Decentralized Perps Are Here

APR 22, 2020 • 4 Min Read

Anil Lulla

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Regardless of what stats you look at, it’s clear that perpetual contracts are the most popular trading product in crypto. As a refresher, a perpetual contract is a special type of futures contract (futures are a contract between two parties to buy or sell an underlying asset at a specific date for a predetermined price in the future). As the name suggests, perpetual contracts go on “forever” and do not come with an expiry date. Instead, perpetual swaps allow traders to take highly leveraged positions with minimal upfront capital. Pioneered by Bitmex in 2016, Bitcoin perpetual contracts are now traded on every centralized derivatives exchange. It’s been a long time coming…but this week, decentralized perpetual contracts were finally introduced to the market. 

 

On Monday, the non-custodial exchange dYdX launched perpetual contract markets that enable the trading of any non-Ethereum based asset. The first market they’ve gone live with in a private Alpha was BTC-USDC (unfortunately not available for US investors). For the first time ever, someone can get up to 10x leverage on BTC from a non-custodial decentralized exchange.

 

Why is this important? For a few different reasons. Centralized alternatives often require often require KYC, rely on a counterparty for trades to be processed, as well as need collateral to be custodied. However, with dYdX – this whole process can now be automated via smart contracts. As always, decentralization comes with its trade-offs, however, the benefits it provides for perpetual markets are noteworthy. Finally, these markets will be fully transparent and auditable. 

 

Coming off the recent mishap with BitMEX in March, the timing couldn’t be better. BitMEX received a lot of pressure from users for the lack of transparency within their liquidation process.  So much so that the exchange ended up publishing a pretty thorough explanation to help provide some insight into how their liquidation engine and insurance fund work. You know what’s better than an in-depth post though? A decentralized exchange where anyone is able to perform liquidations which remain verifiable on-chain. As centralized exchanges continue to run into issues which end up causing their users to second-guess their trustworthiness, I believe decentralized alternatives will slowly start taking market share for these similar products.

 

The key here is obviously liquidity. BitMEX has remained king for quite some time thanks to its huge pool of liquidity. They even held on to their dominance for a while despite other exchanges launching similar products. Eventually, as liquidity started to shrink – traders looked for opportunities on other exchanges. This has led to the rise of their competitors like Binance and Huobi, who have now garnered quite a large amount of liquidity on their respective platforms. As you can see below, BitMEX’s market share of total Bitcoin Futures Volume and Open Interest has fallen significantly since the beginning of March. It won’t be easy for a decentralized alternative to chop away at these whales, however, over time I definitely expect a “flippening” to occur.

Meanwhile, dYdX is in the best position they’ve ever been in to capitalize on this opportunity. The exchange has originated over $1 billion in loans in the past twelve months and have started to take a meaningful piece of the DEX market share. Additionally, BTC-USDC is simply the first trading pair the exchange is starting with. Other perpetual contracts dYdX plans to launch this year include ETH-USDC and DAI-USDC. In theory, the infrastructure can be used to trade traditional instruments synthetically such as Gold, S&P500, Oil, etc as long as there is a reliable reference index on-chain. We could potentially see interesting new derivatives on DeFi given the advantages that decentralized perpetuals bring. It’s important to note, FutureSwap (recently covered by my colleague Paul within his Delphi Daily) just went live on Ethereum with perpetual swaps for ETH-DAI offering up to 20x leverage. It will be interesting to watch as decentralized perpetual contracts start attracting liquidity, especially to see which platform emerges as the winner. As always, we’ll be sure to keep an eye on the space to keep all our members informed as soon as any actionable insights present themselves.

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