Perpetual Market

With the development of blockchain fundamentals, the crypto Market Capitalization (MC) peaked close to $3 trillion in 2021 November, and ended the year with $2.25 trillion MC. Up till 2022 July, with the recession of the U.S economy, the crypto MC decreased to $1.19 trillion.

In the derivative market, we can see the gradual blooming during the development of crypto. Especially in 2021, the total trading volume of perpetuals is $56 trillion, a 358% increase from the entire trading volume of derivatives in 2020 ($12 trillion). We can notice that the perpetual market occupied over 50% of the whole derivative market in 2021, which is a significant part of the derivative market compared with others.

Besides, from the graph we can check the volume trending till Aug 2022, it’s gradually shaping into a mature market compared with the years of 2020.

Sources: Coinglass.com Database, Perpetual Volume from Feb 2020 — Aug 2022

It’s predictable that as the market becomes bigger and bigger, traders are becoming more and more professional and rational. We can therefore state that there is going to be an increase for the perpetual market to continue its growth. In this case, we are confident that the perpetual Decentralized Exchange (DEX) will continue to increase its market share of derivative trading.

The Opportunity of Perpetual DEX

As can be seen from the graph below, billions of dollars of the perpetual market belongs to Centralized Exchanges (CEX), with about 60% of this market share belonging to Binance alone. So there is opportunity for projects to be created, and by capturing just 10% of this market share, it would yield a trading volume of roughly 10–20 billion.

Source: Coinglass Volume of Futures

dYdX is considered to be the biggest DEX for perpetual trading, and on 16 Feb 2022 it reached its highest volume of $15 trillion being traded. However, despite this, this only only accounted for about 13.8% of the perpetual market, with the total amount of perpetual volume becoming less and less.

Why consider perpetual DEX’s?

The data of the CEX exchange is not transparent, and there is a risk of it being manipulated by the CEX itself, as of April 2019, the BTI Summary of Market Surveillance study discovered that 17 of the top 25 exchanges on CoinMarketCap had over 99% fraudulent volumes (Cong, L. W., Li, X., Tang, K., & Yang, Y., 2021). The interests of users and exchanges are in conflict. Once a user makes a profit through leverage, it means that the exchange loses money. That’s why the fake transaction data and ‘pins’ happen (Chen, J., Lin, D., & Wu, J., 2022)

Besides, according to Lehar, A., & Parlour, C. A. (2021) research, there are lots of negative news exposed by CEX, such as fake wicks to bait users into longing and then immediately dumping the position on them, otherwise know as ‘Pump and Dump’. There are tremendous opportunities for perpetual DEX to establish a larger market share over its CEX counterparts.

dYdX & GMX

dYdX

dYdX is a perpetual ‘DEX’ with a governance token token that allows the dYdX community to govern the dYdX Protocol (“the protocol” or L2). By enabling shared control of the protocol, dYdX allows traders, liquidity providers, and partners of dYdX to work collectively towards enhancing & growing the protocol.

Strengths

i. Using the API to get the order book from all over the web.

ii. Derivative transactions are centralized at L2 (using Starkware’s ZK-Rollup), and transactions are settled in the L2 system.

Funds must be deposited into an Ethereum smart contract before they can be used to trade on dYdX. Once deposited into L2, there is no fee for each transaction, and the gas fee would be zero.

iii. Instant trade and fast withdrawal.

Transactions are matched off-chain and held in batches until zero-knowledge aggregation and proofs are committed on-chain. This prevents early-running transaction settlements and allows instant balance updates.

iv. Price oracle optimization.

Prices are obtained by oracles using STARK-compatible signatures, allowing prices to be used immediately after signing. This significantly increases the economic security of the system against flash crashes and allows for real-time liquidations.

Whilst there are several strengths of dYdX, there are also several weaknesses to the protocol as well as several concerning questions raised about its status of being a DEX.

Weaknesses

i. Semi-decentralized

Decentralization should be the priority of any of the products in blockchain otherwise, what separates us from the centralized systems that we are trying to break away from? The reason why we yearn for Decentralized Finance (DEFI) is that we do not want any centralized authority to be entitled to control a person’s assets. For example, with the whole Tornado Cash crackdown, protocols have started banning front end interaction with wallets who have used Tornado Cash post 8th of August, 2022.

Although dYdX is in the transition process from semi-decentralization to full decentralization, there are still many obstacles that will impede this process.

GMX

GMX launched on Arbitrum as one of the original protocols (along with Dopex). The goal was to serve as a centralized execution hub for the L2, while using the time to refine their liquidity provider model (GLP) and tokenomics. The ultimate goal is to take their unique 0-fee perp trading experience and deploy cross-chain.

Strengths

i. No price affect with large amount

The GMX liquidity model enables traders to enter positions of any size without affecting prices. A trader cannot leverage 500 BTC on any other DeFi protocol without the effect on order book pricing.

ii. GLP

GLP doesn’t use an x*y=k Automated Market Maker (AMM) model. Instead, it makes use of a decentralized counterparty clearing house system. The protocol pulls prices from Chainlink oracles rather than price-weighting their pools, which helps to avoid some arbitrage problems.

iii. Disintermediation of the price-maintenance system Price feeds will eventually be managed by third parties like Keeper DAO.

By introducing the concept of the Algorithmic Market Operations Controller (AMOC) Frax v2 broadens the notion of fractional-algorithmic stability. An autonomous contract (or contracts) that implements arbitrary monetary policy as long as it doesn’t deviate from the FRAX price’s peg is known as an AMOC module.

As with FRAX’s AMOC model, this will enable GMX to extract arbitrage opportunities from the system. For GMX investors, this results in more value being extracted.

iv. esGMX token system

In order to negate sell pressure of the governance token, liquidity providers and governance token holders are rewarded with esGMX on top of the trading fees they are given. By enabling users to stake their esGMX for multiplier points, it enables a larger bandwidth of rewards to staked governance token holders as well as enables community funded projects like GMX Blueberries to have rewards that don’t directly cause sell pressure of the token.

Weaknesses

i. Limited trading choices

In GMX, there is a limited selection of what tokens can and can’t be traded. Limiting the diversity of tradable tokens only decreases the user experience and ignores a potential opportunity of the market.

Screenshot of the tradable tokens on GMX’s Arbitrum

ii. esGMX token system

Whilst we discussed positives earlier regarding the esGMX system, there are a few negatives we believe we should address. The esGMX system can be seen as a perpetual staking mechanism to trap holders in the platform. By enabling a 365 vest period, it requires not only a period in which you have to earn the esGMX tokens, but a 365 day vesting cycle for you to actually receive these tokens. You have to stake liquidity for up to 365 days in order to fully vest, whilst also receiving new esGMX tokens, meaning the 365 day period is continuously increasing.

El Dorado Exchange (EDE)

Origins

The origins of El Dorado exchange is an idea from an enduring legends story.

Early 16th-century, Spanish explorers in South America had heard tales of an indigenous people living in the Andes highlands in what is now Colombia. There was a celebration at Lake Guatavita to mark the beginning of the rule of a new chieftain. There are many different accounts of the ceremony, but they all agree that the new monarch was doused in gold dust and that gold and priceless jewels were thrown into the lake to satisfy an aquatic god…

Where is the gold…?

Like the Conquistadors of the past, the Web3 participant is the 21st century equivalent, exploring the Brave New World of opportunities that crypto currencies and DEFI now provide. El Dorado exchange is the end of your journey and beginning of a new one, as now, you can find gold and make your wealth.

El Dorado Exchange (EDE) is a decentralized spot and perpetual exchange It is aimed at providing efficient services that are indistinguishable from CEX. For EDE, all the interactions will happen on-chain. Like that of GMX, the goal of EDE is to expand its reach across different blockchains and ultimately provide a DEX 0-fee trading experience to ALL participants of the Web3 ecosystem, not just those who don’t use privacy focused applications such as Tornado Cash.

City of Gold

We called ourselves El Dorado Exchange for a reason. We want to be the on-chain City of Gold for the trader & liquidity provider to come partake in to make their own gold. To do this, we are offering the following:

• Lucrative trading competitions for the trader to take part in and make their wealth.
• Lucrative liquidity provider incentives by segregation of the liquidity for traders into multiple different ELP liquidity pools, each representing a higher risk class of tokens.
• Extensive review from our internal team to ensure the security of our contracts as well as comprehensive audits undertaken to prioritize user security.
• Introduction of our revenue based algorithmic stable coin, $EUSD, a collateralized stable coin based on the income of the platform.

We are excited about the release of our platform as well as the future that we have planned. El Dorado exchange is our Web3 City of gold. Future articles are planned to be released detailing our exciting ecosystem we are planning to create and the thought and consideration we have gone through in order to one day realize our vision of being that City of Gold on-chain.

The website will be online soon.
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Join the discussion on Discord: https://discord.gg/HEEtCBRjYp

Ref

Chow, A. R. (2022). TIMES: A New U.S. Crackdown Has Crypto Users Worried About Their Privacy. Retrieved from https://time.com/6205143/tornado-cash-us-crypto-ban/

Chen, J., Lin, D., & Wu, J. (2022). Do cryptocurrency exchanges fake trading volumes? An empirical analysis of wash trading based on data mining. Physica A: Statistical Mechanics and its Applications, 586, 126405

Cong, L. W., Li, X., Tang, K., & Yang, Y. (2021). Crypto wash trading. arXiv preprint arXiv:2108.10984.

Lehar, A., & Parlour, C. A. (2021). Decentralized exchanges. Working paper.