Copin Analyzer 101: Perp DEX
Decentralized perpetual futures exchanges, aka perp DEXs, are blockchain-based cryptocurrency exchanges, that allow investors to trade perpetual swaps.
What is a Perpetual Decentralized Exchange?
Since the collapse of FTX, many traders have abandoned centralized exchanges in favor of on-chain alternatives. Decentralized perpetual exchanges have seen a massive increase in cumulative trading volume and user activity.
A perpetual DEX, short for Perpetual Decentralized Exchange, is a type of decentralized trading platform that enables continuous trading of perpetual contracts. Perpetual contracts are a form of derivative contracts that simulate the price movement of an underlying asset without an expiration date. They allow traders to speculate on the price of assets like cryptocurrencies, commodities, or indices without owning the actual asset.
These DEXs are decentralized, non-custodial, and permission-less. They use liquidity pools for liquidity, can incorporate order book models, and allow for leveraged perpetual contract trading.
How Perpetual DEX Works
That’s a ton of technical jargon. Let’s break it all down.
Decentralized: Perpetual DEXs operate on the blockchain, across a network of distributed computers. Smart contracts form the core of perpetual DEXs. These smart contracts automatically execute actions and trades according to their programming and users’ inputs.
Non-Custodial: Users keep possession of their crypto assets when they trade on perpetual DEXs. Users never hand over their keys to a centralized custodian.
Permission-less: Like most other Web3 dApps, no permission is required to access a perpetual DEX. With just a Web3 wallet, anyone can connect to a perpetual DEX in one click. No KYC. No BS.
Liquidity Pools: Liquidity for trading comes from liquidity pools. Individuals, groups, and institutions elect to provide these DEXs with liquidity for trading. This liquidity is pooled together on the blockchain and is under the control of specific smart contracts. In exchange for the liquidity, providers are paid a percentage of trading fees generated by the exchange.
Order Trading Book: Perpetual DEXs can combine the power of decentralization with the familiarity and utility of an order book trading model and interface.
Leveraged Perpetual Contracts: Perpetual contracts are agreements that allow traders to bet on the prices of underlying real-world assets. They’re “perpetual” because there’s no expiration date. A trader can enter into a long or short position bet and keep the trade open indefinitely. Leverage can be applied, usually anywhere between 2X – 100X.
Why Perpetual DEXs Matter?
Decentralized perpetual trading is one of the few sectors in DeFi with product market fit. Perpetual DEXs offer several advantages over traditional exchanges:
1. Secure
Because perpetual DEXs are decentralized across the blockchain, they’re not exposed to centralized points of failure. Thus, perpetual DEXs are immune from the risks of negligence, recklessness, or fraud from centralized actors. With perpetual DEXs, there’s no more wondering if your exchange will become the next FTX blow-up, because neither Sam Bankman-Fried nor anyone else, is at the helm. Moreover, users always retain their crypto keys when using these DEXs.
2. Transparent and Accessible
Perpetual DEXs are fully transparent because they’re ultimately reduced to smart contract code on the blockchain. Anyone can review the code at any time. And all trades are visible on the network. No more centralized black boxes and unknowns. Everything is out in the open.
Perpetual DEXs don’t discriminate and are resistant to nation-state interference. With a VPN and a Web3 wallet, anyone can access a perpetual DEX with complete anonymity no matter where they’re located.
3. Continuous Trading
Perpetual DEXs enable 24/7 trading, providing liquidity and opportunities for traders to take advantage of price movements at any time.
4. Retail Investment Opportunities
Perpetual DEXs present a unique investment opportunity for retail investors. That’s because these DEXs depend on lots of individuals and groups choosing to pool their money together to create liquidity for the exchange. Anyone can become a liquidity provider and receive payments from the DEX’s transaction fees. A DEX’s documentation, tokenomics, and code can all be reviewed before any investment takes place. No more gatekeeping from the big investment firms. No more exclusion because your investment bag is too small. No lock-up periods.
Current State of Decentralized Perpetual Futures Exchanges
The cryptocurrency market has seen futures trading volumes surpass spot market volumes, with futures often leading spot prices. However, decentralized exchanges (DEX) have shown a lower market share in futures trading, recording a maximum of 2% and currently hovering around 1.3%.
Before Layer 2s, traders had to go to the BNB Smart Chain to trade perpetual futures on-chain. ApolloX was the runaway leader in this epoch, providing perpetual trading services for PancakeSwap, the dominant DEX on the BNB Smart Chain.
The only other alternative was to use centralized exchanges, and trading volume has caused Binance to grow into the platform it is today. But as advances in scalability provide new possibilities, the next generation of perp DEXs rapidly evolve, and most of these reside on Layer 2s, specifically the Arbitrum network. Some of the top contenders operating now include:
In this comprehensive guide, we’ve explored the concept of perpetual DEXs, where continuous trading takes place on decentralized exchanges. Perpetual DEXs offer traders the advantages of decentralization, accessibility, continuous trading, and non-custodial control over their assets. As the popularity of perpetual DEXs grows, you can start analyzing and copying the best on-chain traders with Copin Analyzer!
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