The ability to swap token A for token B without going through centralized channels is as old as DeFi itself. Indeed, non-custodial trading is the very essence of DeFi. But while the technology to do so onchain has been available for years, predating even the first AMM, Uniswap, futures trading has taken longer to develop.
Due to the complexities of futures trading, particularly when it comes to perpetual contracts, which have no expiry date, the burden placed on DeFi protocols is far higher than that for executing spot swaps. Speed, liquidity, and user experience have all had to be massively optimized for this capability to be perfected and for users to start seriously trading onchain perps in their droves.
But through trial, error, and good old perseverance, DeFi developers have gotten there, pioneering responsive platforms that allow users to trade a wide range of crypto assets with high leverage and no custodial risk. As a result, perps is evolving from “just another DeFi use case” into a major driver of onchain volumes. Here’s how it happened.
DeFi Perps Perk Up
At the start of 2021, DeFi derivatives TVL stood at less than $65M. Today it’s well over $5B and recording millions of dollars in onchain volume every day. While not in any danger of challenging the billions of dollars that futures CEXs handle each day, these numbers are remarkable given the challenges that DeFi developers faced in creating the infra capable of sustaining this activity.
Perpetual contracts allow traders to amplify their positions using leverage, enabling significant exposure with relatively low capital outlay. This capital efficiency is particularly appealing in volatile markets, offering opportunities for enhanced returns. But it’s the increase in onchain liquidity that’s occurred over the last three years that has been one of the primary catalysts of greater perps volumes, with deeper liquidity pools facilitating smoother and more efficient trading. This is particularly desirable for whales who wish to trade with size – a demand that only CEXs were able to satisfy until relatively recently.
Another factor that’s been instrumental in the growth of DeFi perps has been the deployment of more scalable networks, particularly L2s and L3s that are better suited to high frequency trading. Perps traders typically make more transactions than spot traders, since they routinely create multiple positions, set stop losses, take profit, adjust stops, and close out positions. Doing this on an L1 can prove very expensive, as one of the first perps DEXs, dYdX, discovered. Not surprisingly, it soon jumped shipped to its own chain, built using Cosmos technology.
Another of the first perps platforms to have seen significant adoption is GMX, which has become a dominant protocol on Arbitrum, where it’s now supporting hundreds of millions of dollars in volume every day. Other protocols such as Jupiter on Solana as well as Hyperliquid are also at the vanguard of this trend, with a combined TVL that runs into the billions. But the growth in onchain perps hasn’t just been down to a handful of protocols that form the front-end for all this activity; it’s also on account of innovation occurring behind the scenes to supply the infra this burgeoning DeFi vertical demands.
Perpetuals for the People
Solutions such as Perpetual Hub, developed by Orbs, are now routinely used to facilitate onchain perpetual futures trading across multiple blockchain networks, providing the liquidity for perps activity to flourish. Perpetual Hub is actually a basket of complementary products including Hedger, which acts as a market maker by providing liquidity and filling user orders. It serves as the counterparty to trades, leveraging external liquidity sources, including centralized exchanges like Binance, to ensure deep liquidity.
Hedger is accompanied by Liquidator, which monitors leveraged positions to ensure they remain adequately collateralized, and Price Oracle which provides accurate and timely price data by bridging off- and onchain information. This ensures the integrity of unrealized profit and loss calculations and the proper functioning of liquidation mechanisms. Orbs has recently partnered with SYMMIO and IntentX to enhance capital efficiency for perps traders, with SYMMIO supplying the smart contract layer for intent-based perpetual futures trading and IntentX the frontend user interface.
The collaboration between the three entities demonstrates that solving perps pain points is often best achieved through combining technical excellence and sharing infrastructure. This is, after all, what DeFi is all about utilizing open-source technology and connecting composable products to create products that are greater than the sum of their parts.
This is by no means the only example of innovation in the field of DeFi perps, incidentally; all across the industry, major players are upping their game by releasing new versions of their products that add significantly improved functionality and user experience. With v3 of its onchain protocol, for instance, dYdX is introducing a virtually unlimited number of markets fed by a single unified liquidity pool and adding products such as leveraged prediction markets. Synthetix is also expanding its synthetic assets to include perpetual futures and Hyperliquid has found product-market fit by enabling leveraged trading of popular Solana tokens long before CEXs have caught on.
Where Next for Perps?
Thanks to massive improvements in speed, interface design, liquidity, and supported assets, onchain perps is one of the fastest growing and most innovative DeFi verticals. It’s powering new use cases, attracting new users, and laying the groundwork for pro traders and institutions to onboard and start exploring the unique features that decentralized perps markets have to offer, from novel assets to sophisticated reward mechanisms.
The rise of perpetual futures in DeFi marks a new era of onchain trading, characterized by advanced financial tools and robust platforms that rival anything CEXs can offer. This growth will only lead to more good things for DeFi, from greater institutional interest to deeper liquidity, further solidifying DeFi’s role as the most accessible financial system ever created.
Disclaimer: Coinspeaker is committed to providing unbiased and transparent reporting. This article aims to deliver accurate and timely information but should not be taken as financial or investment advice. Since market conditions can change rapidly, we encourage you to verify information on your own and consult with a professional before making any decisions based on this content.
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