Original Author: Pablo Bartol

Original Translation: Shenchao TechFlow

Introduction

In the derivatives field, perpetual contracts are more popular than options and have gained wide recognition in retail and institutional markets. The total trading volume of BTC perpetual contracts has grown from around $3 billion per day in early 2020 to $13 billion in 2023.

This series of articles aims to provide an overview of the current DeFi perpetual contract landscape and compare different protocols, with a focus on how they work rather than their potential as investment tools.

The following 60+ protocols are covered in this analysis:

0x, Alex, Angle, Apollo, Avantis, BlueFin, bZx, Cap, Contango, ConvergenceRFQ, DDEX, DDX, Deri, Derivio, Digitex, Dolomite, Drift, dYdX, Futureswap, Gains Network, Gearbox, GMX, GMX Forks, Good Entry, Hubble, Hyperliquid, IDEX, Increment, InfinityPool, Injective, Kujira, Kwenta, Lendroid, Levana, Level, Lexer, Mango, MarketProtocol, MCDEX, Mux, NFTperp, Numoen, OpenBook, Opyn (Squeeth), Perennial, Perpetual Protocol, Perpy, Pika, Polynomial, Predy, RabbitX, RageTrade, Sentiment, Serum, STFX, Syndr, Synfutures Protocol, Synthetix, Tigris Trade, Tribe 3, Unidex, Variabl, Vega, Vela, Vertex, Vyper, and Zeta Markets.

In this article, we will first provide a brief overview of perpetual futures, and then extensively categorize the above protocols. Based on this categorization, we will delve into the differences between these protocols, exploring the tradeoffs they make in providing liquidity and contract pricing methods.

Review of Perpetual Contracts

In this section, you can find a brief introduction to perpetual contracts.

1. Futures contracts are legal agreements that specify the buying or selling of specific goods, assets, or securities at a predetermined price in the future. Unlike options, futures contracts do not have the choice, the agreement is binding.

2. Perpetual contracts are a type of futures contract without an expiration date, hence the name. The concept of perpetual contracts was first proposed by Robert Shiller in 1992, and BitMEX implemented perpetual contracts for the first time in 2016.

Perpetual contracts are Delta-1 products, which means that the contract price will change by 1 US dollar for every 1 US dollar change in the underlying asset. For example, let's assume the trading price of Ethereum is 2000 US dollars. You open a long position in a perpetual contract with a notional value of 1 Ethereum. After a period of time, if Ethereum reaches 2200 US dollars, the profit will be 1 Ethereum * (2200 US dollars - 2000 US dollars) = 200 US dollars, minus trading fees and funding rates.

This allows traders to speculate on the price fluctuations of assets without worrying about the time range. Traders can keep their long or short positions open for as long as they choose. However, traders need to be aware that they have to pay fees and, in the case of leverage, closely monitor the health of their positions to avoid the risk of forced liquidation.

In most perpetual contract agreements, liquidation is a crucial component as the accumulation of bad debts could lead to the bankruptcy of the agreement and/or liquidity providers (LPs). Funding rates or borrowing rates (specific terms depend on the agreement) are implemented to facilitate market efficiency, provide arbitrage opportunities, and compensate participants taking on less-desirable positions in order to balance open interest (OI).

Classification of Perpetual Contract Agreements

There can be a very broad classification based on two main variables.

1. Does the agreement require locking liquidity within? It can be seen as: Is there a liquidity pool, or is it entirely peer-to-peer (P2P)?

2. Does the agreement directly impact the market, thereby causing or affecting the price discovery of the underlying asset or contract? Or does the agreement use oracles to obtain a fair price for the asset?

Based on this, we can propose this basic (possibly oversimplified) classification:

The classification matrix of perpetual agreements is based on two key criteria: 1) External price discovery vs. internal (oracles and non-oracles) and 2) No liquidity lock vs. liquidity pool (P2P and P2P pool)

We will use this classification based on flow of liquidity and pricing mechanism in the protocol's sub-section of the article to delve into the different ways in which protocols offer perpetual contracts.

Order Book

In this section, we can find the following protocols:

Alex, Apollo, Blue Fin (formerly Firefly Exchange), DDX, Digitex, dYdX, Hubble, Hyperliquid, IDEX, Injective, Kujira, Lendroid, Mango, Market Protocol, RabbitX, Variabl, Vega, and Zeta.

AMM-based

AMM

• Leveraged Spot: bZx, DDEX, Dolomite, Futureswap, MCDEX

• Leveraged Account: Gearbox, Sentiment

• Power Perpetuals: Deri, Numoen, Opyn (Squeeth), Polynomial, and Predy v2.

• Perpetual Options: Predy v3.

VAMM

• Drift, Increment, InfinityPools, NFTperp, Perpetual Protocol, Rage Trade, and Tribe 3.

While Predy and InfinityPools both use AMM for building "perpetual options" or perpetual contracts, please note that they are implemented in different ways, hence they belong to different categories. In our previous options series, we introduced some protocols built on similar concepts but more focused on providing option-like experiences, such as Gamma Swap, Panoptic, or Smilee.

Oracle-based

In this section, we can find the following protocols:

Synthetic Liquidity

• Avantis, Gains Network, Deri, Synthetix (Kwenta, Polynomial, etc.), Tigris Trade, and Vela.

Asset Baskets

• Angle, Apollo V2, Cap, Deri, Derivio, GMX and its forks, Good Entry, Levana, Level, Lexer, Mux, Pika, and Synfutures Protocol.

Others

These protocols may not fit into the above categories or may be more suitable to be included in a separate category. Therefore, they are listed here for the sake of completeness, but the rest of this article will focus on the above categories.

Aggregators

In this section, we can find the following protocols:

• UniDEX and MUX.

Similar to spot aggregators like 1inch, Matcha, or DeFillamaSwap. These protocols compare fees and prices across perpetual contract trading venues to trade at the most favorable venue.

Social Trading and Copy Trading

In this section, we can find the following protocols:

• Perpy and SFTX.

They allow users to copy trades made on other platforms. For example, a trader makes a trade on GMX, and other users copy the same trade.

Infrastructure

Protocol that allows other protocols to be built on it.

• 0x, Serum, OpenBook allow protocols to launch order book platforms.

• Vyper, Derivio, Perennial, and Convergence RFQ have solutions for specific use cases. They can generally be seen as foundational layers on which other protocols can build their own markets.

Brief introduction to RFQ. RFQ stands for Request for Quote, where traders typically request quotes and market makers respond with specific tools/assets/quantities, etc.

Expiring Assets

Contango offers expiring assets. These are neither permanent - as they obviously expire - nor are they futures contracts. Contango does not have an order book or a liquidity pool. When a position is opened, Contango borrows in the fixed rate market, swaps in the spot market, and then lends in the fixed rate market. The trading pairs are based on assets available in the fixed rate currency market, such as yield or nominal. At expiration, the contract can be settled in cash or physically.

Perpetual Protocol Market Analysis

Market Overview:

It is important to note that our research has survivorship bias. Despite this, we focus on including the aforementioned protocols, although their degree of success varies.

Before delving into the different types of perpetual protocols, there are two important considerations related to on-chain derivatives, namely regulatory uncertainty and the historical background prior to DeFi.

On-chain derivatives face regulatory uncertainty. They face regulatory challenges that impact the markets. Here are two important cases:

• Digitex, December 2017. The platform faced regulatory scrutiny when it was sued by the Commodity Futures Trading Commission (CFTC) for operating an illegal commodities futures trading platform.

• bZx or bZeroX (Fulcrum Trade), June 2019. The history of bZx is more complex than Digitex. It has experienced four significant losses (link). The protocol is managed by Ooki DAO. CFTC has accused the founder and Ooki DAO of illegally providing off-exchange digital asset trading.

Before the arrival of DeFi Summer in 2020, there wasn't much happening on-chain, and previous working projects didn't see the light of day.

• VariabL, Q4 2017. The last update on the blog was in Q2 2018. VariabL is a derivatives trading platform built by ConsenSys on Ethereum.

• Market Protocol. Last update on Twitter in December 2019.

Order Book

The goal of the Order Book is to fully realize on-chain peer-to-peer trading. However, the main issue is that most popular blockchains are not suitable for a fully on-chain Order Book.

Therefore, different solutions are adopted.

1) Move some parts of the system off-chain. The main one being the matching engine, as it is a resource-intensive (computationally costly) component of the Order Book.

2) Fully on-chain. Shift to Alt layers like Solana, which have lower security but higher throughput. Updates in the Order Book can occur every block or every half-second.

3) Build your own L1. There are two ways to achieve this: building an application chain on top of OP stack or Cosmos, or building a standalone L1 from scratch.

Each approach has pros and cons. For example, moving parts of the application off-chain introduces trust assumptions. Trading off lower security on the underlying chain for faster throughput and less decentralization. Application chains can provide protocols to capture MEV but come at the cost of needing more permissioning settings and adding friction layers.

Automated Market Makers (AMMs)

Unlike Order Books where trades settle P2P, AMMs need to lock liquidity in liquidity pools. The key difference between AMMs and vAMMs is that AMMs require real liquidity, while vAMMs source liquidity directly from an external vault outside the vAMM, hence LP's presence is not necessarily required.

Spot AMMs

In this case, although AMMs aren't perpetual futures, they are included because they allow traders to leverage the underlying asset with Delta=1 exposure by borrowing funds.

However, this type of protocol also has its advantages.

AMMs like Uniswap provide flexibility to trade various assets as long as there is available liquidity. This allows traders to access assets that may not be eligible on other perpetual futures protocols. Additionally, using liquidity already present in spot AMMs ensures continuous liquidity to match buy and sell orders, contributing to price discovery of assets.

However, there are also trade-offs. In order to provide leverage to traders, it is necessary to incentivize borrowers with attractive interest rates and/or rewards for deposits. Furthermore, while we mentioned the potential to trade all assets by using the spot market, there is also a need for some degree of permissioning in order to prevent users from misusing borrowers' funds through front-running, exploits, etc.

LPs avoid bankruptcy risk by not being direct counterparts to traders. However, this comes at the cost of LPs becoming borrowers and assuming credit risk as traders.

Regarding Power perpetual futures, they were introduced by Paradigm in 2021. Opyn (SQUEETH) was the first team to implement this protocol. In short, they have returns of n^x, for example ETH².

VAMM

vAMMs provide a decoupled market structure that facilitates independent price discovery from the underlying spot prices. This can result in price discrepancies between futures prices and asset spot prices, creating arbitrage opportunities. On the other hand, what is the true price of perpetual contracts?

vAMMs face another challenge, which is liquidity. Lack of deep liquidity can trigger unexpected or undesirable price fluctuations during opening/closing positions.

The vAMM model relies on liquidation positions and balanced holdings to keep the mark price close to the spot price. However, this generates inherent imbalances and deviations, particularly during market crashes or extreme market volatility.

Oracle-Based Protocols

Broadly speaking, oracle-based protocols can be defined as protocols with liquidity pools serving as counterparties. Unlike AMMs, the protocol itself does not provide price discovery, but instead uses oracles to price the underlying assets from other sources.

We can find two prototypes of oracle-based perpetual futures:

• Synthetic liquidity. A single asset is used as the basis for all trading markets. LPs can become counterparties for all these markets using oracles.

• Basket of assets. Using a basket of assets as the counterparties for trading. That is, in the assumed BTC/USDC, BTC is used as collateral for long positions, and USDC is used as collateral for short positions. More assets can be added, but this is the general underlying principle.

Synthetic assets. Their advantage is that there is no actual restriction on which markets can be added, as the counterparty of the single asset is tradeable. As long as there is a reliable oracle. This makes the protocol more flexible in adding markets. However, this poses more risk for liquidity providers as they take on the risk of certain assets that cannot be hedged on-chain. For example, as a counterparty to gold or USD/JPY. The upside is that assuming the basket of assets maintains a 50% USD balance within the pool, there won't be unexpected temporary losses, similar to the case of temporary losses in Uniswap V2.

The protocol that uses a basket of assets provides a more stringent set of settings for liquidity providers, which is beneficial for risk management (volatile assets support long positions, stable assets support short positions, so there is collateral in the system even if the prices fluctuate drastically). This comes at the cost of the traders, as they don't have as many markets to trade. For example, in GMX v1, you can only trade five assets. However, a very reasonable rebuttal or question is whether most traders really want access to markets outside of Bitcoin and Ethereum. You can find trading volume data broken down by assets here. A quick look at the data shows that for Gains Network, 50-70% of the trading volume is generated on Bitcoin and Ethereum, while for Kwenta, it's around 40% to 80%.

Protocol Segmentation

In the previous section's market overview, we turn to explore the different parts that the protocol can be decomposed into. This article will focus on liquidity provision and pricing.

Liquidity Provision

From the protocol perspective, we can broadly divide it into two groups:

• P2P transactions. Hence, there is no need to lock liquidity on the platform (TVL=0).

• Liquidity pools. Trading through AMMs, vAMMs, or oracles.

This section covers topics such as:

Liquidity mechanisms in decentralized protocols. Who are the counterparties of the traders? - Roles and incentives for liquidity providers - Balancing liquidity across different assets and markets.

Order Book

Simply put, market makers and market takers trade with each other. The protocol may incentivize liquidity for market makers/takers.

For the protocol, the challenging task is how to match market makers and market takers' orders in a timely manner. For example, according to a report from Deutsche Börse Group in May 2023, the participants react in less than 2770 nanoseconds. Now, can this be handled by a generic chain like Ethereum? The answer is no.

This forces the agreement to either move off-chain or to a dApp, and forces the validators to also run the order book. This demonstrates that liquidity providers are active agents interacting with other participants. Apart from market makers who may not provide liquidity for meme coins like HarryPotterObamaSonic 10 Inu, there are no real barriers preventing these coins from being listed on the order book.

Spot AMMs

Here, the liquidity used for settling trades comes from AMMs like Uniswap. Nonetheless, the protocol itself needs to incentivize borrowers to come in as they are the ones providing leverage to traders. Sentiment and Gearbox, although allowing users to do more, also fall under this category. Liquidity providers play a relatively passive role, simply providing leverage.

Power Perpetuals

Power Perpetuals, such as SQUEETH, involve two participants. One party is bullish on ETH², while the other is bearish on ETH². As each protocol follows a different design, they cannot be generalized. For example:

• In Opyn, the short side mints Power Perpetuals using ETH as collateral. Long traders can only buy SQUEETH on the open market, for example, on AMMs like Uniswap. Therefore, they also need the ability to sell in order to profit.

• In Numoen, the long side mints the token and liquidity providers offer LP tokens as collateral, which they lend to traders.

• Deri uses a single liquidity pool as the counterparty for all derivatives (including Power Perpetuals). Therefore, although Deri is included here, its liquidity model is essentially the same as oracle-based protocols.

• Polynomial has not yet released its model, but the team has indicated that it will use the liquidity pool in a way that differs from its competitors.

vAMMs

In terms of liquidity provision, vAMMs employ various different approaches.

• Perpetual Protocol and its protocols that follow its model (such as NftPerp). In theory, liquidity providers are not actually needed here, as vAMMs do not require counterparties when minting synthetic tokens. What happens without counterparties? That's why in Perp v1, the team was one of the main liquidity providers for a period of time, as they acted as market makers to facilitate trading. Later on, liquidity providers were introduced, ensuring continuous liquidity even with the hope to match longs and shorts. Therefore, in this model, liquidity providers can be passive (providing liquidity for traders to take) or more active (arbitraging prices and collecting funding fees).

• Increment adopts a similar model to Perpetual Protocol, but instead of using the Uniswap v3 model, it concentrates liquidity by utilizing Curve's V2 mathematics. Each liquidity pool in the protocol may have different parameterizations based on the volatility of the assets in the pool.

• Rage Trade introduces the concept of "full-chain circular liquidity." What is full-chain circular liquidity? Full-chain circular liquidity is a treasury that divides liquidity into 80-20 parts, where 80% of the liquidity is redeployed to provide liquidity on Curve, while the remaining 20% provides concentrated liquidity on Rage Trade (supported by Uni v3). The virtual liquidity of the vAMM is supported by the 80-20 treasury.

• InfinityPools achieves its liquidity by building on top of the concept of concentrated liquidity in Uniswap V3. By rebalancing liquidity positions similar to Uniswap, it can achieve very high leverage without the risk of liquidation. For example, a liquidity provider deposits assets worth $1000 in the ETH/USDC pool with a price range of $900-$1000. Then, a trader can borrow the liquidity provider's position and redeem all liquidity with 1 ETH (1 ETH = $1000).

• Drift V1. Drift utilizes a VAMM called Dynamic AMM (DAMM), where liquidity is sourced from liquidity providers on Drift. The AMM implements a set of parameters to fine-tune market depths, such as price multipliers, fee pools, or tranches. Drift V1 AMM is now part of Drift V2.

Hybrid Mode: AMM + Order Book

One issue that order books may face is: what if there are no market makers present to place buy and sell orders? Therefore, some protocols introduce a hybrid model between order books and AMMs to ensure continuous liquidity.

• Drift v2 uses three different liquidity mechanisms. First, there is an Instant Dutch Auction (JIT dutch-auction) provided by market makers. This process lasts about 5 seconds. Second, there is a limit order book that only executes limit orders and is operated by administrator bots. Third, if there is no market maker participation in the first two steps, a constant product AMM - Drift V1 AMM will be used to ensure continuous liquidity for traders.

• Vertex uses a price/time priority algorithm, so orders are executed based on the best price, whether it is provided by an AMM or a market maker. The AMM quotes discrete price levels on the order book, approximating xy=k.

• Syndr combines an off-chain order book with a liquidity pool deployed on Arbitrum. The AMM integrates liquidity provided by retail users, while the order book is intended to be quoted by market makers.

Oracles and Synthetic Assets

Liquidity provision is relatively simple. There is an insurance pool acting as the counterparty for all trades. While the main liquidity providers passively provide liquidity, we can also identify active participants who seek to acquire funding rates. By doing so, they balance the platform's open interest, encouraging more trading to take place.

Liquidity to the insurance pool can be provided in the following ways:

• Stablecoins denominated in USD, such as Avantis, Gains Network, Deri on zkSync, and Tigris Trade, where DAI, USDC, or USDT support all transactions depending on the protocol. Another distinction of the protocol is whether they implement a tiered mechanism like Avantis.

• Volatility assets. For example, Kwenta and other protocols are built on top of Synthetix, where SNX stakers act as the counterparty for trades.

Oracles and Basket of Assets

The main idea is similar to the above, but instead of a single asset, it involves a basket or multiple baskets of assets.

• Similar to the previous category, protocols can also have tiered mechanisms - Level - or none - GMX, Pika, and MUX.

• Although Angle is here, the function has been disabled due to the Euler hacking incident. In a nutshell, Angle is the issuer of the agEUR (Euro Stablecoin). The collateral assets used to mint agEUR are used as counterparties for traders. Therefore, someone can provide 1 ETH to obtain 1000 agEUR, and can long ETH and short Euros, thus keeping the protocol neutral. This also allows Angle to have perpetual contracts in the forex market, such as the agEUR/USDT trading pair.

• It is worth mentioning Lexer Markets here, as they utilize both asset baskets and synthetic liquidity.

Price Discovery

We can classify price discovery as either internal or external to the protocol, and subsequently categorize the protocol’s use of oracles for broadcasting.

This section covers the following topics:

Price discovery methods - Price slippage - Settlement.

Order Book

As the order book facilitates P2P trading between buyers bidding and sellers asking, it creates a market for price discovery and trade execution. In this case, the protocol allows traders to execute trades at any price without the use of oracles.

Price slippage occurs when orders may be too large to be filled at a specific price, or when there is not enough liquidity at that price level, thus pushing the order to a less favorable price for execution.

The settlement process of order book trading involves two participants, namely market makers and takers. Market makers place limit orders on the order book, while takers are traders who accept and execute existing orders on the order book. Trades occur when a taker's market order matches a market maker's limit order.

The presence of funding rates is to balance long and short positions, while keeping the derivative contract's price near the price of the underlying asset.

Spot AMM

Price discovery occurs outside of the platform. As these protocols integrate into spot AMMs or DEX aggregators, trades occur on platforms like Uniswap, Curve, etc. Therefore, price discovery is limited by the number of integrated trading venues and the liquidity within these venues.

For spot AMMs, oracles are crucial, primarily to ensure optimal price execution for buyers and sellers. Oracles are also used to monitor the health of their positions; more details on this will be discussed in the risk section.

Settlement is done with the liquidity present on (or with) the AMM where the trade is executed. However, it is important to note that effectively two trades need to take place: buying/selling assets against collateral when the position is opened and selling/buying assets on the market when the position is closed.

Since there are no derivative prices, there are no funding costs. However, in order to conduct margin trades, users have to pay borrowing rates to lenders.

vAMM

In a very broad classification, we can place all vAMMs within the same category, excluding InfinityPools. vAMMs face slippage issues with their virtual liquidity reserves. Trades are settled against the assets used to mint the virtual liquidity.

Perp Protocol, Rage Trade, Drift, and other similar protocols based on Uniswap V3. The index price is tracked through an oracle; for example, Rage Trade uses Chainlink. Each specific perpetual contract discovers the reference price independently through open market. Each vAMM may implement different variations on how to converge between virtual (market) price and index price. For example, Drift will update the quoted asset reserves or the k factor (xy=k).

Infinity Pools are built based on the concept of Uniswap V3, and they can achieve very high leverage by rebalancing the liquidity positions in their vAMM, without worrying about liquidation risks.

• A liquidity provider deposits assets worth $1000 in the ETH/USDC pool, with a price range between 900 and 1000.

• A trader borrows and redeems all the liquidity, obtaining 1 ETH (1 ETH = $1000) and using $100 as collateral. This will result in the following three scenarios depending on the price of ETH.

• If 1 ETH > $1000 → the trader makes a profit. The profit is the difference between the spot price of ETH and $1000.

• If $1000 > 1 ETH > $900 → the trader's account will be collateral + 1 ETH. At any time, this will be equal to or greater than $1000. The worst-case is ETH valued at $901 + collateral of $99.

• If 1 ETH < $900 → the trader's entire capital will be converted to ETH. There is no "risk" for liquidity providers since their entire liquidity provision will be in ETH if it is on Uniswap. In this particular example, the trader would have 1.11 ETH as collateral for their 1 ETH position.

Hybrid: AMM + Order Book

• Drift V2 has a very transparent pricing mechanism. Trades are first priced through auction, then through an order book, and finally through AMM.

• Vertex will provide quotes for users using either an order book or AMM. Currently, market makers mostly provide tighter quotes, but if the size of AMM expands significantly, the AMM may also provide tighter market quotes.

• In Syndr, the AMM functions similarly to the GMX/GLP pool, but includes a buy/sell spread.

Based on oracles, composite assets, and a basket of assets.

These protocols use oracles (hence the name) to determine the prices of contract trades. In turn, oracles determine asset prices using different methods, such as relying solely on the Uniswap Price Time-Weighted Average Price (TWAP) (which has limited effectiveness) or aggregating prices from the most liquid centralized exchanges (CEX), primarily Binance. To further illustrate this:

• The Gains Network price is relayed through a set of semi-permissioned bots that require NFT ownership. These bots use Chainlink asset prices when executing limit, stop-limit, take-profit, stop-loss, and liquidation orders.

• GMX. GMX v1 uses a combination of custom price feeds and exchanges such as Binance and Chainlink. If fast prices are available within 5 minutes, only Chainlink prices are considered. For GMX v2, a new low-latency Chainlink oracle will be implemented. The oracle maintainers are operated by the GMX team.

In terms of price slippage, since trading is done against the oracle-based pools, there is effectively no price slippage. This can lead to some special cases where traders can go long or short low-liquidity assets without any price impact. However, some protocols introduce solutions to this issue, such as introducing synthetic slippage fees or requiring minimum price deviations to profit from closing positions.

Settlement is done with the assets provided by the pool's liquidity providers. Ideally, the long and short positions should balance so that the pool has no actual delta exposure and liquidity providers only profit from fees. However, this is not always the case, as the liquidity in the pool acts as the counterparty to traders. In situations of significant market volatility, this works well as traders experience long-term losses, but in a one-directional market, such as a terra luna crash, the situation becomes unstable.

Funding fees exist but are not meant to balance prices; they are meant to balance open positions. This is a typical risk mitigation method implemented by the protocols.

Power Perpetuals

Again, it is difficult to generalize the design of each Power Perpetuals, as their implementation varies. Furthermore, some Power Perpetuals can be classified within other categories, such as Deri, or have not yet disclosed their models, such as Polynomial.

However, we believe it is worth emphasizing specific aspects of these cases, such as in Squeeth:

• Index Price: The index price of Squeeth is ETH².

• Mark Price: The mark price is the current trading price of Squeeth.

• Power Perpetuals relies on arbitrageurs to maintain the index and mark prices to stay close. But it's not just about price.

• Volatility: The market may overestimate/underestimate volatility. Funding rate will be too high/low.

• Price: The difference between the index and mark prices.

• Slippage may occur when buying on AMMs, which can be problematic as liquidity is usually not very high.

• Similar to AMMs, traders need to buy and sell simultaneously in the pool to make profits, which combined with the above points, may sometimes lead to suboptimal user experience.

Conclusion

In this article, we provided an extensive overview of the perpetual contract market, including liquidity provision and pricing of these contracts. In this report, we studied more than 60 different protocols.

Just by the number of perpetual contract protocols deployed in the past 4 years, it is evident that the perpetual contract market has achieved substantial product-market fit and may, to some extent, lead to market saturation. A simple example illustrating this is the increase in the amount of Bitcoin held in perpetual contracts, which went from approximately 300,000 BTC (worth around $3 billion) in 2020 to approximately 450,000 BTC (worth around $13 billion) by 2023.

Order books are likely the most common type of trading mechanism, which is why dYdX currently has the largest trading volume among decentralized perpetual contract exchanges (perp-DEXs). The reason why order books are favored by most market makers may be because they give market makers (liquidity providers) flexibility and finer control over the prices at which traders buy and sell. However, technological limitations in today's blockchain space have led protocols to employ alternative methods of liquidity provisioning.

AMMs and vAMMs were very popular in the early days of DeFi cycles. Most of them eventually adopted the route of Uniswap v3 (concentrated liquidity). AMMs ensure participants have continuous access to liquidity as long as it exists, but may come at the cost of absorbing toxic order flow. InfinityPools and Predy use new AMM methods where Uniswap LPs are utilized as liquidity sources.

In between order books and AMMs, two protocols - Drift and Vertex - have adopted hybrid approaches to provide liquidity and pricing. By combining these two models, they aim to balance the advantages of both, allowing users to have fine control over their trades while using AMM as a backup to ensure continuous liquidity.

On the other hand, oracle-based protocols require reliance on a third-party infrastructure--oracles--for operation. Users are able to trade without worrying about the liquidity depth of specific trading venues and the convenience of liquidity provision (just by adding liquidity to the pool), which also contributes to the success of these protocols.

In the future, we plan to delve deeper into the risk management strategies adopted by perpetual protocols, their fee structures, and their integration into a broader DeFi LEGO ecosystem. By studying these aspects, our goal is to gain a comprehensive understanding of the evolving landscape of perpetual futures exchanges.