Re-Evaluating The Decentralized Derivatives Landscape

JUN 07, 2022 • 37 Min Read

DISCLOSURES: DELPHI VENTURES HAS INVESTED IN ETHEREUM, DYDX, MCDEX, AND VEGA. DELPHI DIGITAL CONSULTING INC PREVIOUSLY PROVIDED ADVISORY SERVICES TO THE TEAM DEVELOPING PERPETUAL PROTOCOL. THE AUTHORS OF THIS REPORT HAVE MATERIAL OPEN POSITIONS IN ETH AND GMX. A CO-AUTHOR OF THIS REPORT IS AN ADVISOR TO GMX. THE AUTHORS HAVE NOT PURCHASED OR SOLD ANY TOKEN FOR WHICH THE AUTHORS HAVE MATERIAL NON-PUBLIC INFORMATION DURING THE RESEARCH AND DRAFTING OF THIS REPORT. THESE STATEMENTS ARE INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE OR SELL ANY TOKEN, OR TO USE ANY PROTOCOL. THE CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE INVESTMENT DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.

Key Takeaways

  • The market share of decentralized derivatives exchanges is up 10x from one year ago but still only sits at 2% vs CEXs. DEXs are a flagship product for crypto but still have a long way to go in terms of speed, liquidity, UX, and composability in order to truly compete with their centralized counterparts.

  • The first iteration of vAMMs with no real liquidity — Perpetual Protocol v1 and Drift Protocol — have ran into significant obstacles, the most prominent of which is “terminal price reversion”. Critical issues with this model have led us to the conclusion that pure vAMMs with no liquidity do not work as intended.

  • The second iteration of vAMMs looks to learn from its predecessors and incorporate real liquidity. Rage Trade puts an interesting spin on vAMMs with real liquidity by using the concept of “recycled liquidity” where they allow users to deposit LP positions to back the virtual liquidity. Perpetual Protocol v2 uses USDC liquidity to create range orders consisting of virtual tokens in Uniswap v3.

  • Using oracle-based pricing, GMX has built a sleek DEX to facilitate spot swaps and margin trading. By importing pricing from exchanges like Binance rather than incurring the cost of finding an asset’s true price a la Uniswap/Perpetual Protocol, GMX’s model gives traders a good UX without punishing LPs. But this model isn’t without its flaws.

  • dYdX is the king of decentralized futures, accounting for over 85% of on-chain perp volume. However, this smooth experience is partly facilitated by dYdX hosting their trading and matching engine on Amazon Web Services (AWS). With dYdX v4, the team plans to further decentralize the trading and matching engine. v4 may also help DYDX become a value accruing token.

  • The decentralized futures market is quite young and different models are still being tried and tested. Ultimately, we think the end game leads us back to orderbooks and exchanges like dYdX that can rival CEXs in user experience but also have the added benefits of composability that blockchains can bring. But the final word is far from in.

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