Rise of Decentralized Perps
By: Ahmad Jaouni
Feb/14/2022
A Quick Overview on Perps?
Traditionally, a “perp” (short for perpetrator) is what Horatio Caine would call a guy that he was pursuing, and in typical Caruso fashion he would use a creepy monotonous croak… “puuurrrp”… which simultaneously draws you in and makes you cringe. Somewhat less traditional, but increasingly relevant to cryptocurrency markets, a “perp” (short for perpetual) is a reference to a perpetual swap, which is a type of futures contract that does not have a set expiry, i.e. a futures contract with a perpetual rollover. Normally, perps (we’ll try to stick to the crypto definition from here on) cannot be settled with the delivery of an asset; instead, they are cash settled on an exchange. Moreover, these types of contracts come with a funding rate attached, which is a fee paid by either the longs or the shorts, depending on whether the funding rate is positive or negative respectively. Simply put, if the funding rate is positive, the longs are the ones paying the fee, while the shorts will be paid the fee.
Perps Background
The idea of perps was first introduced to the cryptocurrency market by Arthur Hayes, the founder and former CEO of Bitmex. Anyway, Bitmex was infamously the first centralized exchange to offer users 100x leverage and the first to offer perps to its users. Both were revolutionary developments that have had lasting impacts on crypto markets. Almost immediately, this triggered other exchanges to follow suit, with perpetual swaps today making up the majority of the daily trading volume on most exchanges.
Global Spot Volume Monitor of Centralized Exchanges
As of February 14 2023 [1]
Global Derivatives Volume Monitor of Centralized Exchanges
As of February 14 2023 [2]
Today, perps are considered a standard tradeable asset class and are in fact the most liquid contracts in crypto. This phenomenon is a testament to their success and popularity, prompting many Decentralised Exchanges (“DEXs”) to start focusing on perps as an untapped market on-chain. Until recently, all DEXs operated as spot-only marketplaces, using an Automated Market Maker (AMM) for liquidity. However, with the advent of DEXs that offer perpetuals, traditional market makers now have the opportunity to come on-chain and create an even deeper, more liquid market. All this means that perpetuals have become even more accessible and attractive to investors, as they are now able to tap into a larger, more dynamic market.
On-chain Perps are More Transparent
So, let’s take a closer to look at DEX perpetual contracts – what does it mean now that retail traders will have access to more comprehensive information than ever before? Well, it means that they not only can view the order book and open interest data, but many of the DEXs that offer perpetual contracts now also provide traders with real-time access to liquidation numbers, traders' realized and unrealized profits and losses (PnL) as well as protocol fees. This level of detail is extremely useful in helping retail traders make more informed trading decisions, and can be found on exchanges such as GMX, a decentralized perpetual contracts exchange on the Arbitrum blockchain. To draw an analogy to TradFi, this is akin to having a Bloomberg terminal with all full order and price book permissions turned on. Moreover, users of GMX can also benefit from a variety of features that are designed to maximize their trading opportunities, such as low transaction fees, a high-speed order matching engine, and a user-friendly interface. With all these features and more, GMX is certainly worth a closer look for any retail trader looking for a secure and efficient platform for trading perpetual contracts.
GMX Volume and Fees over time
February 13 2023 GMX trading volume was approximately $257M with $448.1K of fees distributed back to token holders [3]
GMX Traders Net PnL and Traders Profit vs Loss
As of February 14 2023
Top Fee Generating Protocols
As of February 14 2023
GMX generated $532,460.43 in fees on February 13 2023 ranking 4th on-chain. Annualized fees come out to $194.34 M, clearly showing an appetite for on-chain perps. [4]
GMX is special as it has a fee distribution mechanism for token holders. This model would motivate lots of traders to trade on-chain rather than on a centralized exchange to share the fees.
Who Trades On-chain Perps?
Funds, whales, and users have been turning to decentralized perpetual exchanges as an alternative to traditional trading platforms in order to benefit from the increased liquidity and security that comes with using them.
Not only are their liquidities increasing, but the perps are also expected to remain on-chain as long as there are traders engaging with them, allowing for a more stable and secure platform for trading. This is an exciting development for both traders and investors, not to mention the opportunity it provides to developers who are now able to create products on top of the platform, such as options exchanges that are backed by perps for hedging.
With the increased liquidity and security on-chain, the possibilities in the space only continue to grow. Due to perps being the most active product traded in crypto, the infrastructure built onchain to help facilitate and grow this sector could be used by tradfi counterparties to be able to facilitate onchain stock trading. This would allow investors to benefit from the instant settlement, unlike the current T+2 settlement period.
And finally…
Due to the decentralized nature of DEX’s, traders can expect to receive more competitive pricing and expedited settlement vs. what they would encounter on traditional trading platforms – and importantly, all the while benefitting from the central ethos of self-custody paramount to crypto’s success thus far. With these features, decentralized perpetual exchanges provide an attractive option for both traders and developers, and we expect that the space will be one of the most interesting sectors of growth in web3/crypto/blockchain, further increasing its utility and overall use cases by Joe public.
References:
[1] https://www.coingecko.com/en/exchanges
[2] https://www.coingecko.com/en/exchanges/derivatives