DYDX, PERP, GMX: who are the biggest and baddest players in perpetual swaps?
A deeper look into TVL, usage, and the opportunity behind decentralized perpetuals.
I was re-reading a great post about the introduction to perpetual swaps, which have been growing in popularity, ever since Bitmex started the trend in 2016. This got me thinking about the current ecosystem and opportunities for disruption.
So, what are perpetual swaps?
Perpetual swaps are futures contracts with no expiration or settlement. They provide investors the ability to get leveraged long and short exposure to an asset. They do not expire as market participants can pay/receive some sort of fee, called a funding rate, to keep them open.
Let’s break it down a bit.
Let’s say you think $Eth is going up. You are LONG.
Someone else thinks $Eth is going down. They are SHORT.
Both parties decide on the price they think that #Eth is going up or down by. These are matched when the price is the same (going up by $100 or going down by $100).
The contract trades in the open market.
For traditional futures (let’s say a commodity in this example), there is settlement, meaning that at the date when the contract's time is up, the two parties most trade, because someone is holding the commodity (e.g. the corn, wheat, etc), there would be a carrying cost. With perpetuals, there is no expiry, but prices still need to be settled between parties, to prevent prices from diverging from spot. So multiple times per day (2H, 4H, 8H, etc), participants pay each other based on the imbalance between the mark price and index price.
Perpetuals are attractive for a few reasons:
No expiry date for your position
No custody issues, since the underlying asset is not traded
The swap price closely tracks the price of the underlying asset
It’s easy to setup a short
The chart below to see the advantages and disadvantages (dependent on your view):
Market / Opp:
Firstly, let’s take wrap our minds around the sizing of the perpetual futures market, which is incredibly popular as a speculation product, due to the high leverage and ease of use:
Majority of the multi trillion dollar crypto derivatives volume comes from perpetual swaps.
CEX’s (Binance, FTX, Deribit) are doing ~$2T about 20X the size of the decentralized perpetual market.
The leader in decentralized perpetuals (DYDX) does more volume than Uniswap
It’s competitors are catching up.
If trading activity either:
Moves from centralized exchanges to DeFi
Grows overall (at a fairly equally distribution rate based on present).
The main players in DeFi stand to benefit.
So who are the key players in decentralized perpetuals?
Right now, there are three main players:
DYDX (Market leader). Built on Layer2 (starkware)
PERP. Runs on the Layer 2 xDai Chain
GMX. Mainly being used on Layer2 (Arbitrum)
You can see a breakdown of the feature differences and similarities within a table in the whitepaper created by the Perpetual Protocol. Instead I’ll focus on growth metrics.
User growth:
DYDX had a massive surge in users ahead / following a September 2021 airdrop. The protocol boasts roughly 6,000 active users, the majority weighted toward large traders ($10K+).
According to stats.gmx.io, the total user count is ~5,500 (presumably including non-active users).
Perp user growth is lower, at ~2,000 in Oct, which is also its largest month, and appears to continue that trajectory.
The key takeaway for me is all three are growing immensely YoY.
TVL
TVL is a bit more straightforward to pull via API, or via existing aggregators such as Defillama.
The clear leader for now is DYDX, with nearly 5X the TVL of GMX, although this may change due to the incentive structure of GMX (shared trading fees).
Overarching thoughts:
With the exception of new market entrants and/or defi collapse due to risky macro trends, it seems like decentralized perpetuals will continue to grow, with DYDX, Perp, and GMX all continuing to increase adoption rates.
A few factors that may contribute to their rise over CEX counterparts:
Incentives such as trading fee distributions and liquidity mining schemes, will encourage more users to go to DEx’s over CEX’s. This creates a flywheel that will continue to ramp up as usage increases.
The market share of decentralized perpetuals remains small compared to the huge source of liquidity and trading activity, and these remain highly represented by CEX’s. As CEX’s continue to enable the onboarding of user to DeFi (listen to Brian Armstrong’s recent remarks on the Bankless podcast), they will be effectively loosening their own moat, as users demand easier access to Dapps.
If regulatory action targets CEX’s (FTX, Coinbase, Binance), volume may move to decentralized derivatives in the short-term, building network effects for long-term growth.
I’ll continue to update and lengthen this post overtime. Just wanted to rattle off a couple key themes I’ve been reading and thinking about in the meantime.
Thanks for reading,
Jared