Written by: Web3 Farmer Frank
Which on-chain derivative protocols have you used recently?
This is roughly the awkward footnote of the DeFi derivatives track. To be pragmatic, if it weren't for the giant whale James Wynn acting as the 'best on-chain spokesperson' for Hyperliquid, dYdX and GMX, which no longer possess the 'holy grail' status over the past two years, would have seen their rapid decline nearly end the narrative of on-chain derivatives.
The reasons boil down to them being long trapped in the identity of 'CEX imitators': replicating the contract logic and leverage mechanisms of centralized platforms while bearing higher risk exposure and lower user experience. There remain significant gaps in key dimensions such as liquidation mechanisms, matching efficiency, and trading depth compared to CEX, until the emergence of Hyperliquid, which relies on on-chain characteristics to reconstruct product forms and user value, thus preserving the possibility of further evolution in this track.
In the past May, Hyperliquid's perpetual contract trading volume reached 248.295 billion dollars, creating a historical monthly high, equivalent to 42% of Coinbase's spot trading volume during the same period, and the protocol's revenue also reached 70.45 million dollars, setting new records.
However, from a longer-term perspective, the Hyperliquid structure still follows the typical contract trading model, merely taking its first step from optimizing existing solutions to exploring native solutions. This article also aims to delve into deeper issues from the predicament of on-chain derivatives and the development context of Hyperliquid.
The next step for on-chain derivatives is to continue optimizing centralized logical templates, or based on the openness and long-tail asset characteristics of chains, move towards a more differentiated product innovation path?
The 'new ticket' for decentralized derivatives
From a data perspective, regardless of how the market fluctuates, cryptocurrency derivatives are always a super-sized cake that continues to expand—only that the knife and fork for cutting the cake are still firmly in the hands of CEX.
Since 2020, centralized exchanges (CEX) have gradually restructured the originally spot-dominated market landscape by starting with contract futures. Combining the latest data from Coinglass, we find that in the past 24 hours, the trading volume of the top five CEX contract futures has reached the level of tens of billions of dollars, with Binance alone surpassing 60 billion dollars.
If we broaden our perspective, we can intuitively perceive the penetration of derivatives trading. For example, TokenInsight's statistics show that currently, Binance's daily trading volume of derivatives accounts for 78.16% of the total daily trading volume of spot + derivatives (500 billion dollars), and this proportion continues to rise. In simple terms, the current daily trading volume of CEX derivatives is almost equivalent to four times that of spot trading.
However, on-chain, despite DEX spot trading volumes remaining in the tens of billions, decentralized derivatives have yet to open up market gaps: dYdX's daily trading volume is about 19 million dollars, and the once-dominant GMX has both its positions and 24-hour trading volume fall below 10 million dollars, almost forgotten by the market.
The only surprise is the recently regarded 'victory of gradual decentralization' Hyperliquid—breaking the deadlock with the stance of the 'new king' of on-chain derivatives, with daily trading volumes of derivatives once exceeding 18 billion dollars, accounting for over 60% of the on-chain perpetual contract market share.
Its revenue scale surpasses that of most second-tier CEXs, maintaining a growth rate of over 50% month-on-month for three consecutive months. If we closely observe the rise of Hyperliquid, we will find that its key to success lies in the fact that it has reconstructed the value logic through a vertically integrated architecture.
By deeply integrating the order book engine with smart contract platforms, on-chain derivatives can finally compete directly with CEX in terms of trading speed and cost, establishing structural advantages in terms of cost, auditability, and composability (I feel it's somewhat similar to the structural advantages BYD possesses in the new energy market).
This also proves that on-chain derivatives are not lacking in demand, but rather lack products that truly adapt to the characteristics of DeFi. In simple terms, traditional perpetual contracts rely on margin mechanisms, high leverage leads to frequent liquidations, and user risks are difficult to control. Previous on-chain derivatives have yet to create value that CEX cannot replace.
Once users realize that trading on dYdX/GMX requires facing the same liquidation risks but cannot achieve Binance-level liquidity depth and trading experience, the willingness to migrate naturally drops to zero.
It is precisely because of this that decentralized derivatives inevitably demystified from the 'holy grail' in the last round of narrative. Its decline is essentially a deep contradiction between the decentralized framework and the demand for financial products—there is a decentralized narrative but no product ticket that users 'must use'; this is also a core factor that enables Hyperliquid to overtake.
So on the surface, the overwhelming advantage of CEX comes from its user base and liquidity depth, but the deeper contradiction lies in the fact that on-chain derivatives have yet to solve a core proposition: how to balance risk, efficiency, and user experience within a decentralized framework? Especially as the industry enters a deep water zone of derivative innovation, how can we minimize the entry barriers for new users and maximize asset efficiency?
In fact, Binance's recently launched 'event contracts' provide a new reference point—essentially a variant of options products, confirming the market's strong demand for simple, easy-to-use, 'non-linear returns'.
From my personal perspective, if one wants to jump out of the competitive red sea of perpetual contracts, options may be a more suitable remedy for the general user—its 'non-linear returns' characteristics (limited losses for buyers and unlimited potential gains) naturally align with the high volatility of cryptocurrencies, while the 'small prepayment of premiums' mechanism can significantly meet the simple trading needs of the general user for small investments.
From contracts to options, is there a promised land for on-chain derivatives?
Objectively speaking, in the field of on-chain derivatives, options with 'non-linear returns' characteristics are actually the most suitable product form: not only do they naturally avoid liquidation risks, but they also achieve a better risk-reward ratio than futures contracts through 'time value leverage'.
However, due to the complexities of options, such as exercise dates and strike prices, they are not as intuitive as perpetual contracts for retail investors. Especially the complex exercise rules of traditional options (such as expiration dates and spread combinations) always present a structural contradiction with retail investors' pursuit of simplicity and immediate trading, and this mismatch is particularly evident in on-chain scenarios.
Thus, for decentralized options products, the issue lies in how to build an on-chain options system that can balance 'Crypto capital efficiency' and 'product friendliness'. It is worth mentioning the 'coin-based perpetual options' mechanism proposed by Fufuture—attempting to reshape the underlying logic of on-chain derivatives through 'de-complexification' and 'capital efficiency revolution'.
If we break down the structure of 'coin-based perpetual options', the key point lies in its literal meaning: 'coin-based' and 'perpetual options'.
Only with coin-based can we maximize the capital efficiency of 'long-tail assets'.
The core starting point of 'coin-based' is to maximize the release of users' capital efficiency of on-chain Crypto assets. After all, in the context of the meme coin wave and the outbreak of multi-chain ecosystems, most users' on-chain assets exhibit highly fragmented characteristics, such as being scattered across different chains and long-tail token assets.
However, existing protocols often require settlement in stablecoins, which forces users holding long-tail assets like BTC, ETH, or meme coins to either be unable to participate directly in trading or passively bear exchange losses (currently, mainstream CEXs also settle in USDT/USDC and have minimum trading limits), fundamentally contrary to the DeFi concept of 'asset sovereignty freedom'.
Taking the currently exploring decentralized coin-based options protocol Fufuture as an example, it allows users to directly use any on-chain token as collateral to participate in BTC/ETH index options trading, aiming to eliminate the exchange step and activate the derivative value of dormant assets—such as users holding meme coins can hedge market volatility risks without liquidating.
From the data, as of May 2025, in the margin trading supported by Fufuture, the margin positions of meme coins such as Shiba Inu (SHIB) and PEPE account for a high proportion of the platform's active positions, proving that users indeed have a strong demand to use non-stablecoin assets for options hedging and speculation, also indirectly validating that 'coin-based' margin is indeed a significant market pain point.
The ultimate leverage idea of 'expiration options' perpetualization
From another dimension, in recent years, there has been an increasing preference for high-odds short-term trading of expiration options—since 2016, small trading users have started to flock into options, with 0 DTE options trading accounting for 5% of the total SPX options trading volume, rising to 43%.
Source: moomoo.com
And the 'perpetualization' of expiration options actually provides users with the opportunity to continuously bet on high-odds 'expiration options'.
After all, the setting of the 'exercise date' in traditional options severely mismatches the short-term trading habits of most users, while the frequent opening of 'expiration options' inevitably becomes overwhelming. Taking Fufuture's design logic of introducing perpetual mechanisms in options products as an example—eliminating fixed expiration dates and instead adjusting holding costs through dynamic funding rates.
This means that users can hold put/call option positions indefinitely, only needing to pay a minimal daily funding fee (far lower than the financing rates of CEX perpetual contracts), which allows users to extend the holding cycle indefinitely, transforming the high-odds characteristics of 'expiration options' into a sustainable strategy while avoiding passive losses due to time decay (Theta).
For example, it may be more intuitive to feel this here. When users open a 24-hour BTC put option using USDT or other long-tail assets as collateral, if the BTC price continues to fall, their position can be held long-term to capture greater returns; if the judgment is incorrect, the maximum loss is limited to the initial margin, and there is no need to worry about liquidation risks—simultaneously, at the end of the 24 hours, users can freely choose whether to continue the extension.
This combination of 'limited loss + unlimited gain + time freedom' essentially transforms options into 'low-risk perpetual contracts', significantly lowering the participation threshold for retail investors.
Overall, the deep value of the 'coin-based perpetual options' paradigm shift lies in when users realize that any long-tail token in their wallets, even meme coins, can be directly transformed into risk hedging tools, and when the time dimension is no longer the enemy of returns, on-chain derivatives are likely to truly break through the niche market and build an ecological position that can contend with CEX.
From this perspective, the potential of 'coin-based perpetual options' to showcase 'new tickets' may be one of the key weights that tilt the balance of the game between on-chain and CEX.
Will on-chain options yield new interpretations worth paying attention to?
However, the large-scale popularization and penetration of options, especially on-chain options, are still in the very early stages.
Visibly, since the second half of 2023, new entrants in on-chain derivatives are exploring entirely new business directions: whether it is the on-chain native leverage of Hyperliquid or 'coin-based perpetual options' like Fufuture, decentralized derivatives trading products are indeed brewing some seed variables for significant changes.
For these new-generation protocols, besides achieving a direct confrontation with CEX in terms of trading speed and cost, as well as releasing the capital efficiency of long-tail assets on-chain, including memes, it is more crucial that, based on the on-chain architecture, they can maximize the binding of interests among the community, trading users, and the protocol itself—liquidity providers, trading users, and the protocol's own architecture can form a network of 'shared gains and losses' (taking Fufuture's protocol architecture as an example):
Liquidity providers earn risk-layered returns through a dual-pool mechanism (high returns from private pools + low risk from public pools);
Traders participate in high-leverage strategies with any asset, and the maximum loss is clearly defined;
The protocol itself captures ecological value growth through governance tokens;
This fundamentally subverts the traditional CEX 'platform-user' exploitation relationship. When the long-tail tokens held in users' wallets can directly become trading tools without relying on CEX, and when trading fees and ecological value are distributed to ecological contributors through DAOs, on-chain derivatives finally reveal the form that DeFi should have— not just a trading venue, but a value redistribution network.
This is actually also the 'DeepSeek moment' that the market has been longing for in the on-chain derivatives space for years—allowing decentralized derivatives to break through the constraints of trading experience, gradually introducing on-chain native leverage and maximizing capital efficiency, no longer relying on CEX as a necessary component, thus hoping to bring a larger leap for the market, fostering more boundaryless innovations and ushering in a new 'DeFi summer'.
Historical experience tells us that every round of narrative explosion requires the resonance of 'correct narrative + correct timing'. Whoever can solve the most painful asset efficiency issue for users at the right time will hold the scepter of on-chain derivatives.
In conclusion
I personally believe that decentralized derivatives protocols are undoubtedly the 'on-chain holy grail' and not a narrative false proposition.
From multiple dimensions, decentralized derivatives still have the potential to become one of the most scalable and revenue-generating tracks in the DeFi ecosystem. However, it must truly step out of the shadow of 'centralized substitutes' and leverage the on-chain native structure and efficiency revolution to complete the self-reform of product forms.
However, the key issue is that, for on-chain users, the value of decentralized derivatives lies not only in providing new trading tools but also in whether it can establish a path of 'frictionless asset flow—derivatives hedging—compound growth of returns'.
From this perspective, when meme coin holders can directly participate in Crypto long-tail asset trading with tokens and when multi-chain assets can become collateral without cross-chain, the form of on-chain derivatives can be considered redefined. This is also the leap-forward thinking of new-generation players like Hyperliquid and Fufuture.
Perhaps the ultimate outcome of decentralized derivatives does not lie in replicating CEX, but in creating new demands using the native advantages of chains (openness, composability, permissionless), and the market may have already taken a key step.