Decentralized Derivatives Exchanges
[Perpetual Future Contracts]
Table of Contents
1. Introduction to Derivatives
2. Introduction to Decentralized Exchanges
3. Comparison of DEXs offering Perpetual Future Contracts
3.3. Tokens & Leverage Offered
3.4. Values and Emphasis on Decentralization
Derivatives typically mean financial contracts in which its value is derived from the underlying; in this case, Crypto Tokens. Derivatives are usually used to hedge/manage risk, speculate or leverage on the underlying.
Within the crypto sphere the most common derivatives we hear about are the Perpetual Futures Contract aka the “Perpetual Swap” and Options Contracts. There are many other innovative derivatives, however, in this article we will be covering mainly on Perpetual Future Contracts.
A Futures Contract and a Perpetual Contract allow the holder to take a “Long” or “Short” position on the underlying. The fundamental difference between them is that a Futures Contract has an expiry date while a Perpetual Contract does not.
Do take note that you can “receive” or “pay” funding depending on the direction you place the trade and it will be determined by the current funding rate at that point in time. This opens up many more opportunities and strategies for traders to attempt to profit from.
We also have Options, and currently at this point of time, Deribit is the most popular place to trade Crypto Options and they offer BTC, ETH and SOL Option Contracts. Do take note that Deribit only offers European Options; which can only be exercised at expiration, as compared to American Options which can be exercised anytime prior to expiration.
“Why isn’t anybody talking about this?!”
Did you know that BitMEX (Centralized Exchange) was the first to introduce the perpetual swap contract in 2016?
The word “Decentralization” could have a different meaning to each individual.
In this article when we talk about Decentralized Exchanges, it is mainly going to refer to platforms whereby users can conduct a peer-to-peer transaction using the power of smart contracts, by connecting their wallet to the DEX.
One of the ideas behind developing/using a DEX is the removal of an intermediary, such as a Centralized Exchange.
Therefore, a Decentralized Derivatives Exchange just simply refers to a Decentralized Platform offering Derivatives Contracts for Traders to conduct peer to peer transactions.
“Why isn’t anybody talking about this?!”
Did you know not all DEXs offer derivatives?
An extremely popular DEX (Uniswap) only offers Spot Trading!
There are quite a number of DEXs offering perpetual future contracts (and more on the way!).
We are attempting to present an unbiased view of each protocol, so we encourage these protocols to connect with us if you feel that this is not an accurate description, or you would like us to further highlight certain points!
Each DEX has its strengths (and also weaknesses!), therefore, in accessing which DEX to trade perpetual future contracts on, we have narrowed down some points for discussion.:
Are there sufficient users trading on the platform?
We can have an attractive unrealized PnL, but if we can’t exit our existing positions at a favorable price, are our “profits” really profits?
Are there a wide variety of trading pairs?
Is the leverage offered sufficient?
How does the team address concerns regarding Decentralization?
It is also important to acknowledge that each individual has their own perceptions and preferences in regards to these key points. There is no “One Size Fits All” and we do recommend giving multiple protocols a try to decide which suits your needs.
After all, it is not uncommon that some users might choose to use a protocol based solely on its User Interface, as an easy and straightforward platform to use allows users to start trading immediately!
Generally, what we are looking for is a consistency of users trading on the platform. We have noticed certain protocols/apps having a surge in popularity but have failed to keep its users.
We want to see consistency in which users actually stay and use the protocol, because there is something that sets it apart from the many other DEXs offering perpetual future contracts.
In regards to the Unique Traders for the Last 30 Days on the image by HashBrown Research shown below, we can see that although GMX and SynFutures have each peaked around 2000 Unique Traders each day for the last 30 days, SynFutures have remained slightly more consistent, in comparison to GMX.
Source: HashBrown Research on Dune Analytics [UTC 2022-10-26 05:44:00]
https://dune.com/hashbrown_research/leveraged-trading-on-dex
For the long term sustainability of the protocol, we want to see new traders coming on the protocol. But naturally, the trading volume does play a huge role in this too; after all, what is the use if there are many traders but none are putting on “size” to fulfill the liquidity needs of other traders?
This brings us to our next point. Besides the bid and ask spread, volume is another way to assess liquidity. In the image below we can see the Last 30 Days Perpetual Volume of various protocols. GMX easily takes the top spot in terms of total liquidity for the last 30 days.
Source: HashBrown Research on Dune Analytics [UTC 2022-10-28 02:20:00]
https://dune.com/hashbrown_research/leveraged-trading-on-dex
However, in accessing the daily volume for the Last 30 Days, SynFutures yet again wins in terms of consistency as compared to the other 3 Protocols for the Trading Volume during the Last 30 Days.
Source: HashBrown Research on Dune Analytics [UTC 2022-10-26 07:47:00]
https://dune.com/hashbrown_research/leveraged-trading-on-dex
Therefore it depends on what each user regards as most important when selecting a protocol to trade on. E.g. Are you looking to trade with size? Then volume is probably an important factor for you.
Do remember that we are not limited on which protocols we can use, we can switch around whenever we find another protocol which suits our needs better; E.g. Do they offer a token pair which meets your needs?
This is also the beauty of DEXs, it is usually a simple step of connecting your wallet and you can start trading immediately.
It is interesting to note that some popular protocols such as dYdX easily does much more volume than these DEXs but of course there are Pros and Cons, which we will touch on later in this article.
Source: 24H Trading Volume on dYdX [UTC 2022-10-26 07:32:00]
https://trade.dydx.exchange/portfolio/overview
The fees we pay for trading are undeniably one of the most important aspects we need to consider when choosing where to trade decentralized perpetual contracts.
This is especially important as most traders who are active scalpers will mostly agree that fees are a huge factor in determining their PnL.
Summary of Fees As at UTC 2022-10-27 06:22:00 | |||
DEX | Key Points | Takeaway | Full Fee Structure |
Mux Protocol | Open Fee: 0.10% × Asset Price × Position Size Close Fee: 0.10% × Asset Price × Position Size | Fees are higher than average in our opinion. | https://docs.mux.network/protocol/fee-structure |
GMX | The cost to open / close a position is 0.10% of the position size. | Fees are higher than average in our opinion. | https://gmxio.gitbook.io/gmx/trading |
Perpetual Protocol | Taker pays 0.10%. | Fees are higher than average in our opinion. | https://support.perp.com/hc/en-us/articles/5257683596313-Trading-Fees-and-Gas-Fees |
Gains Network | Opening Trade: 0.08% Updating a stop loss: 0.015% Closing a trade: 0.08% | Fees are higher than average in our opinion. | https://gains-network.gitbook.io/docs-home/gtrade-leveraged-trading/fees-and-spread#cryptocurrencies |
SynFutures | Dynamic Percentage. Fair price change <= 10%; then fee is 0.3% Otherwise it is 1.2% Fair price: current market price as implied by the AMM inventories | Neutral | https://help.synfutures.com/en/articles/6132652-the-trading-fee-and-its-distribution https://www.synfutures.com/synfutures-v1-techpaper.pdf |
Kwenta | Exchange Fees // Cross-Margin Account Fees // Dynamic Fees Unfixed amount, refer to full documentation. | Neutral | https://docs.kwenta.io/using-kwenta/futures/exchange-fees |
Mycelium | 0.09% Entry and Exit Fees | Neutral | https://swaps.docs.mycelium.xyz/perpetual-swaps/information-for-traders |
Mango Markets | Maker Fees: Taker Fees: 0.0325% 0.0315% if referred 0.0310% if 10k MNGO 0.0225% if 250k MNGO | Great for the “average” user! | https://trade.mango.markets/fees |
dYdX | Maker/Taker pays no fees for 30 Day Volume below $100,000. | Great for the “average” user! | https://trade.dydx.exchange/portfolio/fees |
Cap Finance | 0% Fees! | Great for the “average” user! | |
Therefore if you are a new user and not looking to trade much, the choice of DEX would definitely be dYdX or Cap Finance if you are concerned about fees.
Tokens Offered
We feel that a very big deciding (probably the most important) factor in where a user goes to trade is whether the platform offers their desired trading pair.
Hence, a simple way to look at it is whether the platform offers a wide variety of tokens available for perpetual futures contract trading. With more variety of tokens offered, the higher the probability in the sense that the platform would offer the desired token pair you wish to trade.
Summary of Tokens Offered As at UTC 2022-10-27 06:22:00 | ||
Variety | DEX | Estimated Token Pairs |
High | SynFutures | “Unlimited” |
High | Gains Network | ~ 39 Pairs |
High | dYdX | ~ 36 Pairs |
Neutral | Perpetual Protocol | ~ 17 Pairs |
Neutral | Kwenta | ~ 14 Pairs |
Neutral | Mango Markets | ~ 11 Pairs |
Low | Mycelium | ~ 7 Pairs |
Low | GMX | ~ 5 Pairs |
Low | Mux Protocol | ~ 5 Pairs |
Low | Cap Finance | ~ 2 Pairs |
Leverage Offered
What we noticed is some protocols are not exactly transparent/do not display the leverage offered clearly.
We feel that this is a basic requirement and users should be able to tell how much leverage they are able to use easily without jumping through hoops to find it.
A common frustration would be users trying to trade on the protocol and realizing mid trade that the protocol did not offer sufficient leverage on the platform to meet their requirements.
When we state “higher risk” it just means that the protocol allows users to take on more risk to size up and vice versa for “lower risk”.
It does not mean that there is a higher/lower risk when trading on the platform per se.
Summary of Leverage Offered As at UTC 2022-10-27 06:22:00 | ||
Risk | DEX | Leverage |
High | Gains Network | ~ 150x |
High | Mux Protocol | ~ 100x |
High | Cap Finance | ~ 50x |
Neutral | GMX | ~ 30x |
Neutral | Mycelium | ~ 30x |
Neutral | Kwenta | ~ 25x |
Neutral | dYdX | ~ 20x |
Low | SynFutures | ~ 10x |
Low | Perpetual Protocol | ~ 10x |
Low | Mango Markets | ~ 10x |
Low | Rage Trade | ~ 10x |
We feel that the basis of choosing to use a decentralized exchange over a centralized exchange is being able to trade in an anonymous and trustless manner.
If we call ourselves a decentralized exchange, our most important values should be prioritizing decentralization.
Taking reference from a recent incident; the blacklisting of Tornado Cash by the US Treasury. dYdX then started blocking accounts that received any amount from Tornado Cash.
It is known that several users did not even know they received funds and were surprised when they were locked out from dYdX. This was the end of it all, as shortly after, dYdX introduced a “liveness check” which identified users from their webcams, as part of a “deposit promotion”. Although this “deposit promotion” was removed due to “extremely overwhelming demand”, we felt the damage had been done.
Admittedly, to be fair to them, they did state from their FAQs (Has been removed) that the liveness check was not mandatory, and who knows what pressure they could be facing to comply with certain regulations, we felt that they could certainly have handled these issues in a better way. There definitely could have been better communication, and being more upfront with users.
However that being said, we still do feel that dYdX is definitely one of the top decentralized exchanges to trade perpetual future contracts on and the platform does have its strengths (Security and Transparency of a DEX, with the Speed and Usability of a CEX) , which is reflected upon its daily volume surpassing even many popular centralized exchanges.
Source: dYdX Twitter Post - Reply [UTC 2022-10-27 01:52:00]
https://twitter.com/dYdX/status/1565329672631717889
Although Crypto/DeFi has been around for a few years, and many builders and those passionate about the space have dedicated immense time and effort such as @zachxbt on Twitter to expose, inform, and recommend what could be done to protect users, exploits and hacks are still happening all the time.
Some recent examples are the Mango Markets Exploit, GMX Exploit and many more. However, some of these exploits are through the exploiter having an in-depth understanding of how the protocol works and “using it as intended”.
There is controversy on it, with some arguing regulators should step in and some arguing that this is the very nature of DeFi, where users have accepted and understood the risks before using it.
We feel that in this case, we need to go back and think of the reasons on why we want to push Crypto adoption. We believe the majority of the community should have the final say rather than arguing whether this is fundamentally right or wrong.
Hence, it is more of how the protocol handles the exploits, the preventative measures as well as how often such exploits happen.
“Why isn’t anybody talking about this?!”
Did you know that many DEXs rely heavily on Oracles such as Chainlink to provide price feeds?
Food For ThoughtAs at UTC 2022-10-27 06:22:00 | ||
DEX | Network/System | Summary |
GMX | // Abritrum | Liquidity is provided by GLP holders, so arguably we can say that when traders on GMX “lose” or get liquidated, the winnings go to GLP holders. Source: https://gmxio.gitbook.io/gmx/glp We think that this is an interesting concept, allowing users to participate as “house” and betting against the fact that most traders will lose. This attracts more people to provide liquidity on GMX, ensuring the long term growth and sustainability of the protocol, as more users come to bet on the battle between traders and the “house”. Also a common saying among crypto users is “If you don’t know where the yield is coming from, you are the yield!”. In this case we can clearly see where the yield is coming from! Source: |
SynFutures | // Polygon // BSC // Arbitrum | No base asset restriction, as long as oracle is available, and quote asset which is used as margin is an ERC20 token. Source: https://www.synfutures.com/synfutures-whitepaper.pdf Able to list and trade any futures contracts based on popular cryptocurrencies, altcoins, indices, NFTs and real-world assets. Source: We think that this is an innovative way for users to be able to trade token pairs which is otherwise not offered by the DEX. |
Perpetual Protocol | // Optimism | Heavily inspired by Uniswap and Synthetix, and relying on a Virtual Automated Market Maker (vAMM). You can read more about vAMM in the links provided below. Source: https://coinmarketcap.com/alexandria/glossary/virtual-automated-market-makers-vamms There is attractiveness to trade on Perpetual Protocol mainly due to its simplicity. |
Kwenta | // Optimism | Powered by Synthetix, with liquidity coming from SNX stakers on Synthetix, and using the power of oracles such as Chainlink to determine the asset price. Source: https://docs.kwenta.io/resources/faq https://docs.synthetix.io/litepaper/ In a way you could say that there is no true “counterparty” when trading here due to its integration with Synthetix. Traders are normally concerned about “price manipulation”, so you could arguably say that it would be difficult to directly “manipulate” any position. |
dYdX | // Starkware (Current- v3) (Unreleased- v4) | Having deep liquidity with it coming from dYdX themselves providing it, an easy to use interface and offering a wide range of token pairs, with no fees for 30 Day Volume below $100,000, it is no wonder dYdX is so popular! Source: https://help.dydx.exchange/en/articles/2906266-where-does-liquidity-come-from |
Gains Network | // Polygon | Powered by Oracles (Chainlink), due to this feature. users can avoid being liquidated by a “scam-wick” as it effectively combats any sort of “manipulation” sometimes seen in any order book models. Source: https://gains-network.gitbook.io/docs-home/gtrade-leveraged-trading/overview Also 150x leverage is an attractive key point as it is undeniable that most involved in this space enjoy high leverage and high volatility! |
Cap Finance | // Arbitrum | Having 0% fees and relying on Arbitrum which has low network fees in general, we are confident that Cap Finance would attract those who are concerned about fees! |
Mycelium | // Arbitrum | Built on a popular chain (Arbitrum), with an attractive and straightforward interface to use, it would be easy for new users to get started trading easily. |
Mux Protocol | // Arbitrum | Offering a wide range of networks to trade on and offering high leverage (100x), it would be easy to see how it would attract users to its platform. |
Mango Markets | // Solana | Built on Solana and offering a 1.25 bps rebate on maker fees, it would be attractive for market makers to come onboard. Source: Due to the recent exploit, the confidence in the protocol has fallen, but we do hope they will bounce back eventually. Source: |
There are many protocols exploring different ways to attract users to trade the perpetual swap contract on its platform.
Another good example would be Opyn (Squeeth) which offers a totally new way of merging options concepts into a mechanism similar to a perpetual swap.
Squeeth is the first Power Perpetual and gives traders perpetual exposure to ETH².
Source:
https://opyn.gitbook.io/squeeth/resources/squeeth-faq
We are in awe of the talented minds within the crypto space in pushing boundaries to innovate new products, which in this case is incorporating options greeks concepts into a product similar to a decentralized perpetual contract and thus creating a totally new financial derivative.
To summarize, we feel that in general, most protocols face minimal (if any) downtime, and are operating based on layer 2 solutions or a network with low fees in general, hence, we think that the deciding factor for most users would be more of the concept of the trading platform and the tokens they offer for trading.
At HashBrown Research, we value the concept of Decentralization, so we would be more inclined to use protocols who are very firm in upholding the same values as us!
What do you feel is most important while trading Perpetual Future Contracts on Decentralized Derivatives Exchanges?
Feel free to connect with us on our Socials as we would like to hear your thoughts!
