original:Messari
original:
The biggest business in DeFi today is decentralized exchanges. Specifically, when implemented on protocols such as Uniswap and Sushiswap, exchange the token you actually own for another token. In trading lingo, this is called a trade "spot".
People tend to believe that the biggest business on a decentralized exchange (DEX) will correlate to the biggest business on a centralized exchange (CEX). However, in terms of trading volume, CEX's spot exchange is actually 10% to 20% smaller than its largest business - futures trading.
Why does this discrepancy currently exist? Which market dynamics are important, and what are the changes in these dynamics? Which protocols are leading the way and why?
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Why is the DeFi spot market larger than the DEX derivatives market?
Spot exchanges in DeFi are leading the way for three key reasons. First, DeFi grew up on Ethereum, where slow transaction settlement times and high costs made it unfeasible to run a decentralized futures market as a base layer. Second, having real tokens on a DEX increases utility compared to tokens simply stored on a CEX. Tokens on DeFi can be used for many things including liquidity provisioning, yield farming, governance, staking, lending collateral, and more. To get these tokens, you need to exchange them on a decentralized spot exchange. Perpetual contract positions currently do not have the same composability or token utilization in the DeFi ecosystem as underlying tokens, and therefore offer little advantage over similar perpetual markets on CEXs.
The key factors affecting the adoption of decentralized futures markets are faster/cheaper transactions, liquidity composability, market depth. With the emergence and maturity of Ethereum L2, sidechains, and L1 competitors, the scaling problem is being solved and a wave of perpetual transactions is ushering in on the decentralized platform.
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Perpetual Protocol（PERP）
What are the head agreements?
dYdX
Perpetual Protocol is the leading decentralized futures marketplace. At present, the trading market is the largest, accounting for more than 80% of the decentralized futures trading volume share. Perpetual Protocol was built using Ethereum's XDAI sidechain for its scaling solution. Trading occurs on the protocol's virtual automated market maker (vAMM), which provides guaranteed on-chain liquidity and predictable pricing set by a constant production curve. In effect, vAMMs provide protocol price discovery, while the collateral backing vAMMs is stored in smart contract vaults.
Futureswap
dYdX, which just raised a $65 million Series C round led by Paradigm, is the second largest decentralized perpetual marketplace with over 12% market share in trading volume. dYdX takes an order book trading approach and is built on StarkWare's StarkEx scalability engine, Ethereum's proprietary zero-knowledge rollup (zk-rollup) solution. The solution is a hybrid infrastructure model utilizing non-custodial, on-chain settlement and an off-chain, low-latency matching engine with an order book. dYdX is currently moving towards decentralization as the platform evolves.
MCDEX
Before suspending trading on its legacy V2 platform in early June, Futureswap was the third-largest decentralized perpetual market with a volume share of just over 11%. The protocol was initially deployed on Ethereum Layer 1, but recently announced a V3 deployment on Arbitrum. V3 is targeting a testnet launch in late June and early July, with a mainnet launch shortly thereafter. V3 will redesign the AMM to improve capital efficiency and simplify the process of providing liquidity.
While Perpetual Protocol, dYdX, and Futureswap lead the way for decentralized futures trading, with Ethereum’s Layer 2 solutions like Arbitrum and Optimism coming online, and the DeFi ecosystem on faster Layer 1s like Solana Development, competition is coming. Arbitrum, launched earlier this month, has the most comprehensive new protocol in MCDEX. DerivaDEX is another protocol looking to enter the space as soon as possible.
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market model
Perpetual Protocol
In general, trading is done through one of two methods: order books or AMMs. Each protocol uses one of these trading models, but is implemented with unique nuances to maximize trader experience or protocol market competitiveness.
Perpetual Protocol conducts transactions on virtual AMMs or vAMMs. "Virtual" means that the AMM itself has no real assets, but instead stores collateral in a separate smart contract vault as a cross-platform collateral pool. This enables the AMM's x*y=k pricing curve to act as the protocol's price discovery mechanism, while traders can benefit from having a single-source, single-asset vault that provides collateral for transactions across all 16 markets offered by the Perpetual protocol .
In contrast to order books, vAMMs are able to trade at known prices, require no counterparty (vAMM is the default counterparty), and have no taker fees. Also, there is no need for liquidity providers to provide liquidity directly to AMM pools, so there is no impermanent loss in the system. The collateral vault will always have enough collateral to pay back all traders using vAMMs for trades (assuming all undercollateralized assets are successfully liquidated in the event of large price swings). Like many other perpetual trading protocols, USDC acts as a single margin collateral provided by traders and is stored in the security protocol's collateral vault.
dYdX
Financing payments are an integral part of a perpetual market to incentivize the convergence of mark prices and index prices. Perpetual Protocol uses the traditional funding method and implements FTX's method of computing financing payments. Payments are made hourly and are based on the position size and the relative difference between the perpetual contract and the TWAP of the underlying asset index price. The protocol uses Chainlink to provide an oracle for index prices.
For traders who prefer the order book trading method, dYdX is the perfect place in the decentralized world. dYdX is the only perpetual trading protocol that uses traditional order books. USDC acts as a single margin asset stored in a cross margin account. 15 markets are available for trading, with markets being added by the protocol's core team.
The order book-based dYdX offers traders more advanced order types than AMM-based platforms. In addition to Good-Till-Date, Fill Or Kill or Post-Only order options, market orders, limit orders, stop orders and trailing stop orders are available. Market makers need to provide liquidity for each market and tend to provide it algorithmically through dYdX's API interface.
Futureswap
Like traditional perpetual markets, dYdX charges funding rates on the unbalanced side of the trade. The financing rate is calculated by an algorithm based on the index price and the perpetual mid-market sample price. These payments are facilitated by the protocol, but are exchanged only between traders (exchanges neither pay nor receive).
Futureswap's upcoming V3 will redesign the previous AMM. The new AMM aims to improve the traditional price curve to provide greater capital efficiency. According to the core team, with $100 million in liquidity provided, a $1 million trade has only a 0.5% impact on price. USDC will be the only margin asset, greatly simplifying the process of providing liquidity to AMMs and protecting LPs from impermanent losses. V3 also aims to provide more advanced trading orders, such as "fill or cancel" or let traders select a price range for the order.
Adding tradable markets will now be determined by governance. The new decentralized oracle network used by the protocol was upgraded in V3 to improve scalability and the ability to support multiple assets.
MCDEX
Launching a new version of the protocol on Arbitrum not only speeds up execution, but is also an important part of composability. So far, perpetual trading protocols have had to adopt largely isolated scaling solutions, limiting the composability of DeFi. Building on Arbitrum will enable other protocols to build on Futureswap.
While not yet live on Arbitrum's mainnet, MCDEX has released details of its unique AMM-based perpetual exchange protocol. The AMM design improves on the classic x*y=k model by utilizing virtual margin and provides more liquidity around index prices by utilizing a proprietary price function. By directly incorporating the index price into the AMM price curve, the curve algorithm can follow the index price and gather liquidity around the index price, thereby bringing higher capital efficiency and lower slippage to traders. However, slippage adjusts dynamically as AMMs take on more risk as a means of protocol risk mitigation.
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risk control
risk control
Perpetual Protocol
Given the leveraged nature of perpetual trading, protocols and liquidity providers face funding risk. Especially when prices fluctuate rapidly. There are options protocol pleas that minimize the risk to the protocol and support the protocol if necessary. Having a well-funded insurance fund for the scope of the agreement is the final key. As a last resort, protocols can implement different forms of risk control in the form of fees, margin requirements, liquidation ratios and unfavorable prices/spreads. One form of risk control employed by nearly all perpetual trading markets is funding fees, which incentivize traders to be on the unbalanced side of a trade.
Risk is ultimately controlled through liquidation enforced by the protocol. 10x leverage is the maximum margin available in Perpetual Protocol, so all positions require a maintenance margin of 6.25%. As long as the margin ratio is above 2.5%, only 25% of the positions will be closed. This method of partial liquidation benefits the trader. To enforce and monitor liquidations, liquidation robots are used. As an incentive, liquidators will be rewarded with 1.25% of the notional value.
In addition to trader-specific trade caps, the protocol also employs open interest caps for the protocol. Position caps are monitored by the core team and adjusted as needed.
dYdX
As a failure insurance for the protocol, the insurance fund is funded by 50% of all transaction fees charged by the protocol. This insurance fund acts as a guarantor for trading losses arising from the agreement.
dYdX manages liquidations by monitoring maintenance ratios and liquidating positions below market minimum margin requirements. The liquidation proceeds are directly returned to the insurance fund. The insurance fund is currently funded and controlled by the core team.
Since dYdX operates on the order book, there is no protocol-controlled AMM standing on the other side of the trade. This mitigates some of the risk issues of protocols where AMM-based protocols must introduce spreads, fees or other mechanisms to compensate for the additional risk.
Futureswap
A scaling solution based on zk-rollup finalizes transactions to layer 1. Thus, in the event of a long-tail event, traders will be able to claim funds on L1 and are not bound by the additional security assumptions inherited in sidechain solutions.
MCDEX
Futureswap's V2 relies heavily on dynamic funding rates and liquidation incentives to secure the protocol. The liquidator alerts the protocol of a liquidation event (doesn't take over the transaction, it just closed) and takes a 30% compensation fee on the collateral. An additional 5% fee will also be assessed to compensate for the risk assumed by the agreement. As with most perpetual swap platforms, dynamic funding rates increase with LP risk. The risk mechanism for the upcoming release has not been confirmed until V3 details are released.
MCDEX also manages risk by liquidating positions that exceed market risk parameters. Custodians (Keepers) observe the margin ratio and can liquidate or assume positions with the LP pool. When the custodian enters the position, he bears the risk of the position and at the same time accepts the liquidation penalty. When liquidated to the LP pool, the position is technically assumed by the AMM, and the LP receives a liquidation penalty. In this case, the custodian gets a "custodian gas reward".
Since each market in MCDEX can be created and managed by users of the protocol, each market has specific risk parameters and independent insurance funds. Operators (initial market creators) are encouraged to fund the insurance fund initially, but anyone can contribute to the fund. When a liquidation occurs, a certain percentage (based on AMM parameters) of the collected liquidation penalty goes to the insurance fund. The remainder goes to the liquidator (AMM or custodian). Each insurance fund has a maximum fund size. When this maximum size is reached, additional funds will enter the AMM's liquidity pool. LPs can increase this cap through governance, but not decrease it.
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business model
business model
Perpetual protocol charges a flat fee of 0.10% on all transactions. This is a simple and transparent business model. The fees earned are split 50/50 between the insurance fund and PERP token stakers. This resulted in more than $4.3 million being distributed to stakers in May, making the protocol the top protocol for returning revenue to users.
dYdX is not yet decentralized and therefore retains all transaction fees collected on its platform. Like centralized exchanges, dYdX offers traders a tiered fee structure based on volume scaling. Additionally, if the trade is made as a market maker, the fees will vary, and market makers can benefit from lower fees to incentivize healthy market makers. Looking back over the last 8 weeks of trading, dYdX charges an average fee income of 0.11% based on its trading volume.
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index
index
Perpetual Protocol currently dominates the decentralized perpetual volume share. 76% of decentralized perpetual transactions are completed on this protocol, with a transaction volume of more than 8.6 billion US dollars. dYdX is the next leading protocol with over $1.4 billion in transaction volume. This represents a 12% market share. Futureswap captured the remaining 12% of the market with $1.3 billion in volume in May. In the case of Futureswap, it should be noted that the protocol began communicating with traders in late May to suspend incentives and trade on the platform in preparation for V3.
Note that Perpetual Protocol collected over $8.6 million in fees in May. This would make the protocol a top 10 protocol by revenue in DeFi. It also returns 50% of the revenue to PERP stakers, making the protocol the third most profitable protocol in DeFi in terms of revenue earned by the protocol (excluding supply-side revenue). dYdX came in ninth. This should come as no surprise, as DeFi's leading businesses are currently DEX spot exchanges like Uniswap and Sushiswap - a profitable business model.
However, the interesting bit comes from capital efficiency or profitability efficiency. Perpetual Protocol, dYdX, and others earn fee income based on the notional value of transactions. Since leverage is available on all perpetual markets, the notional value can be as high as 10-25 times the margin required to trade. This means that perpetual swap agreements need to attract less capital than traditional spot exchanges in order to earn a sizable amount in fees even though the fees are lower.
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looking to the future
looking to the future
At present, decentralized perpetual contracts only account for 0.42% of the transaction volume market share of centralized perpetual contracts, so there is definitely room for growth. Transaction execution speed and cost have been the main barriers to Ethereum adoption, but the Layer 2 landscape is changing rapidly. MCDEX is about to launch on Arbitrum, Futureswap is moving to L2 adoption, and Perpetual Protocol is open to adopting other L2 solutions. Barriers to speed of execution are disappearing fast.
The crypto market is notorious for traders who love leverage, and decentralized platforms are the ones that traders can tap into. Especially given the regulatory uncertainty in the leveraged trading market. There is increasing regulatory pressure to evaluate platforms that offer aggressive leveraged positions of up to 100x, 150x. If regulatory pressure is placed on these markets, decentralized alternatives could be a beneficiary, as traders seek platforms that can accommodate leveraged perpetual products given the layer 2 prospect of trade execution gains.
Once Layer 2 adoption gains traction over the next 3 to 6 months, it would be beneficial to reevaluate the current state of the decentralized perpetual market. The current TAM is larger than the spot market, presenting a huge opportunity for value capture for protocols that can attract capital and users.
special statement
Original: https://messari.io/article/marty-mcfly-goes-defi-an-overview-of-decentralized-futures-exchanges
