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An Update on DeFi Perps

Jul 20, 2021 · 6 min read

By Ashwath Balakrishnan, and Jayden Andrew

Perpetual futures continue to be crypto’s most popular financial instrument. Despite the prevailing market conditions, Binance facilitated $3 trillion of perp volume in May and $2 trillion in June. Perp products on Binance, and other exchanges, have routinely settled more trading volume than spot products over the last year. It’s clearly evident that perpetual futures are incredibly important for crypto — and now they’re making their way into DeFi.

Earlier this year, we published a deep dive into DeFi perpetuals. That report highlighted projects building out perpetual futures and discussed how their designs differed from each other. Last week, we published a post highlighting the success of Perpetual Protocol and its upcoming v2 plans. In this piece, we’ll compare dYdX and Perpetual Protocol’s recent activity in greater detail, since they’re basically the only DeFi perp products currently live. Towards the end, we’ll also give an update on other prominent perp projects gearing up to launch their mainnet in the near future.

A Quick Refresher

Although it lived on Ethereum’s base layer for much of its life, dYdX was migrated to a StarkEx zk-Rollup in April of this year, unlocking cheaper trading and higher throughput.

Perpetual Protocol, as the name suggests, is a perpetual futures product that runs on the xDAI sidechain. The current version of the protocol uses a virtual AMM (vAMM), which enabled them to kickstart new, competitive markets without relying on liquidity providers. Perpetual Protocol’s recently announced v2 will deploy on Arbitrum and leverage Uniswap v3 as its pricing engine.

What the Numbers Say About DeFi Perps

The most obvious data point to gauge traction for an exchange is its trading volume. From the chart below, we can see that Perpetual Protocol has had consistently higher daily trading volumes compared to dYdX. Both protocols hit their peak daily volume on May 19th — with dYdX settling over $150 million in trades while Perpetual Protocol facilitated over $500 million.

But the story flips when we look at unique active traders per week. dYdX saw weekly active users peak at over 3,000 users in May, while averaging well over 1,000 unique users per week between March and July. Perpetual Protocol, on the other hand, peaked at just over 500 weekly active users, while averaging 265 unique users per week since launching on xDAI in Dec. 2020.

So while Perpetual Protocol facilitates more volume per day, dYdX has a larger user base. It’s worth noting, Perpetual Protocol runs an in-house arbitrage bot which contributes a meaningful amount of volume (between 10% and 50% of daily volume since launch). While relying on an internal bot to balance price is obviously not an ideal situation, it isn’t necessarily bad either. All the bot does is open positions on Perpetual’s vAMM to push the mark price closer to the index price, thus offering traders on the platform accurate pricing.

Funding rates are one of the most important metrics to observe when tracking pricing efficiency. The more a perp’s price diverges from its index price, the more drastic funding will be. Funding near 0% implies balanced positioning, while meaningful positive or negative funding implies one side of the market (either longs or shorts) is skewed relative to the other.

Looking at funding rates on BTC, we see dYdX rates are fairly normal, flip flopping between positive and negative territory. However, there have been drastic funding spikes, as observed in early July. Perpetual Protocol, on the other hand, has consistently had negative rates, which indicates the platform has been paying traders to open long positions on their platform. This is a result of their pricing mechanism, which under certain conditions requires an imbalance between longs and shorts to keep the mark price close to the index price.

ETH funding rates reinforce the picture painted by BTC funding rates. dYdX shifts from positive to negative funding alongside the broader market, but has instances of extreme spikes during times of low liquidity. Perpetual Protocol, once again, has consistently negative rates driven by an imbalance in the number of longs to shorts.

In terms of revenue, Perpetual Protocol once again stands tall with higher numbers than dYdX. At its peak, Perpetual Protocol pocketed over $2.5 million in fees while dYdX grazed $500,000. But this data ignores a lot of nuance in how the two protocols operate.

dYdX is an orderbook, meaning there are makers (those who provide liquidity on the orderbook) and takers (those who pull liquidity off an orderbook to match their orders). There are different fee tiers (ranging from 0.05% to 0.2%) for makers and takers, and additional tiers linked to a user’s monthly volume. On the other hand, Perpetual Markets is an AMM, so every trader is a taker by default. A flat fee 0.1% is levied on anyone who executes a trade.

With higher volume, it’s only normal that Perpetual Protocol also has higher revenue. Additionally, according to this Dune Dashboard, Perpetual Protocol’s arbitrage bot has paid $4.5 million in fees, which amounts to approximately 22% of the protocol’s total fees earned since launching on xDAI.

The Future of DeFi Perps

dYdX and Perpetual Protocol are both great venues for trading and should continue to improve over time. But there are some new competitors popping up that could pose a serious challenge to both exchanges:

  • MCDEX v3 will launch on Arbitrum once the layer 2 network releases to the public. The exchange uses dynamic directional slippage to incentivize balance between longs and shorts. Simply put, this means if there are too many longs, a trader entering a fresh long will have to pay a meaningful amount in slippage, while a fresh short would get a good price.
  • Futureswap v3 will also launch on Arbitrum, but it’s unknown if the protocol will be on mainnet as soon as Arbitrum’s public release is live. The specific mechanics of Futureswap v3 are unknown, but the team is extremely competent, so we can expect good things.
  • Vega and Injective Protocol, both built as standalone chains using the Cosmos SDK, are still in the process of finalizing their testnets. Vega, in particular, is interesting to us (note: Delphi Ventures is an investor in Vega Protocol) because it’s a full-stack derivatives exchange that allows anyone to spin up a contract of any kind — be it a perp, option, or a bespoke instrument.