From Margin To Perpetuals: How Decentralized Exchanges Are Redefining DeFi Trading
19 April 2023 - 9:00PM
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The decentralized finance (DeFi) space has been gaining tremendous
traction over the last months, especially in the area of perpetual
trading. The on-chain perpetual exchange sector has seen
significant growth recently, with a total trading volume of $164.2
billion in Q1 2023. According to the DeFi researcher and analyst,
Thor Hartvigsen, the on-chain perpetual exchange sector is poised
for significant growth in the coming years, with projections of
10-20x growth. This growth is driven by the emergence of new
protocols and the increasing number of traders moving on-chain,
especially after the collapse of the crypto exchange FTX.
Decentralized Perpetual Exchanges, The Future Of DeFi Trading?
Hartvigsen’s analysis shows that, as the space matures, it is
expected that the cumulative on-chain perpetual trading volume will
increase to trillions per quarter. Related Reading: These Top 5
Cryptos Are Thriving Despite A Slippery Market Several
decentralized exchanges such as DYDX, GMX, KWENTA, and GNS have
emerged in the on-chain perpetual exchange space, offering unique
features such as low fees, increased privacy, and the ability to
trade various assets without the need for intermediaries. For
example, dYdX was one of the first on-chain perpetual exchanges to
launch in the DeFi space, and it has since gained significant
traction. Despite a decrease in trading activity since 2021, dYdX
still does more in daily trading volume than all of the other perp
protocols combined, with a total trading volume of $913 billion.
The analysis shows that when it comes to on-chain perpetual trading
protocols, dYdX operates differently from its counterparts like
GMX, gTrade, and Level. dYdX has a low trading-fee structure that
is more similar to a centralized exchange (CEX). Furthermore,
dYdX does not charge fees on the first $100,000 traded and allows
users to avoid Ethereum gas on all deposits above $500. This low
fee structure works to dYdX’s advantage as it attracts more traders
to the platform, similar to how CEXs attract traders with their low
fees. On the other hand, GMX is another of the leading on-chain
perpetual exchange protocols, with a total trading volume of $100.5
billion and total fees of $148.2 million. Additionally, GMX is
getting close to launching V2, which will introduce a new liquidity
structure to the protocol, a large number of trading pairs, new
asset classes, and much lower fees. Hartvigsen suggests that the
success of GMX last year sparked the on-chain perpetual exchange
narrative, with its novel liquidity model (GLP) and real yield
distribution of fees to liquidity providers and $GMX stakers
playing a significant role. The Road Ahead For DEXs Hartvigsen also
highlights in his analysis that while the on-chain perpetual
exchange sector is expected to grow significantly, it is unlikely
that it will overtake centralized exchanges in perpetual trading
volume due to CEXs’ larger marketing budgets and ability to onboard
retail more easily. Related Reading: ADA 10% Rally Coincides
With Cardano Foundation’s Annual Report Additionally, regulatory
uncertainty remains a significant headwind for the sector, with
tokens paid as a yield resembling securities to a significant
extent. This could make larger entities from traditional finance
more reluctant to invest in these tokens. Despite these challenges,
Hartvigsen believes that the on-chain perpetual exchange sector has
significant growth potential. The protocols mentioned above are the
ones to watch, but new entrants could also emerge in the future,
attracting significant liquidity. Featured image from
Unsplash, chart from TradingView.com
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