Whether we're in the next big wave or another gut-wrenching bull trap, 2023 has been the year of perpetual contracts. "Perps" have amassed great interest and capital from crypto traders whose risk appetites are notoriously insatiable.
Perpetuals are a modified form of futures contracts that do not have an expiration date. Like traditional futures, perpetuals allow traders to take highly leveraged positions on assets they anticipate will appreciate (going long) or depreciate (going short) in the future. But because perpetuals never expire, they are always cash-settled and can be held indefinitely, making for either a hedge or the ultimate high-stakes investment.
Perps: Origins
Perpetuals first appeared on the crypto scene in 2014 with BitMEX. BitMEX was a centralized exchange designed to develop a specialized derivatives trading environment to suit crypto traders' needs.
As crypto markets took off in the 2017 ICO Craze, BitMEX made their name in the global cryptocurrency exchange space - a major feat for a time when spot markets made up the lion's share of crypto trading volume.
Perps: Evolution
After 2017, new CEXs emerged boasting alternative approaches. Bybit launched, fashioning itself as a futures exchange, and the infamous FTX showed up shortly thereafter with a similar pitch.
These exchanges provided sophisticated perpetual products and fine-tuned exchange environments designed to serve derivatives traders first with spot markets as a secondary offering. In large part, derivatives-first CEXs have successfully won over new users and capital in the last three years.
So much so, in fact, that incumbent CEXs have begun developing perpetual exchanges of their own. Spot market juggernauts Binance, OKX, Kucoin, and others have fully functioning perpetual exchanges and are competing ruthlessly to earn and retain derivatives traders.
Now even Coinbase, crypto's most regulation-friendly exchange, is vying for a slice of the pie with its own Bermuda-based perpetuals exchange, which will offer crypto derivatives traders up to 5x leverage on BTC and ETH.
2023 and Beyond: The Future of Perps
2023 has been monumental in the perpetuals market - and the uptick in trading volume doesn't tell the whole story. Until recently, CEXs have predominantly supported perpetual contracts with specialized liquidation engines and market makers too sophisticated for decentralized infrastructure.
But as with all innovation, it was only a matter of time. Decentralized perpetual exchanges have arrived and are shaking up the crypto derivatives market. In the same way that decentralized exchanges (DEXs) disrupted CEX-dominated spot markets, decentralized perpetual exchanges have set off a mass migration of capital and users to their platforms.
Here's how it works: just like on a DEX or decentralized lending protocol, users supply liquidity to receive LP tokens. But on decentralized perpetual exchanges, liquidity is loaned to margin traders taking on leverage. Essentially, users providing liquidity replace CEXs as the counterparty to leverage traders, establishing a transparent, open, and meritocratic on-chain derivatives market.
Numerous projects have already carved out market share in the decentralized perpetuals sector, and more are on the way to ramp up the competition. GMX has been a leading player on Arbitrum and Avalanche, while DyDx and ApeX Pro have employed their own Layer 2 environments with support from Starkware. Meanwhile, DEX QuickSwap is on the verge of releasing their own perpetual exchange, QuickPerps, to lead perpetual markets on Polygon. QuickPerps also introduces a brand new auto-compounding function that redirects LP rewards back into the main liquidity pool, thereby increasing users' positions and optimizing returns without requiring active management and recurring transactions.
Decentralized perpetual exchanges are only just beginning to take off. There is no telling what the rest of 2023 will hold for crypto, but the wise will be keeping an eye on what unfolds in the wonderful and rewarding world of Perps.
