Decentralized Perpetual Swap Protocols: What Are They? Interview with Huobi’s Ciara Sun

I recently spoke with Ciara Sun, vice president of Huobi Global Markets, about perpetual swap protocols and their pros and cons. On Feb. 8, Huobi published a report dedicated to this subject, so I asked Ciara to help me understand this difficult topic. Let’s dive into the interview!

U.Today: Hello, Ciara. It is very nice to have you here. Can you please help us understand the definition of perpetual swap protocols?

Ciara Sun: Perpetual swap is a futures contract with no delivery date, and it relies on a funding rate to trade close to the spot price. Perpetual swap protocols are perpetual swaps running on decentralized networks such as Ethereum.

U.Today: How do spot and derivatives trading data from Huobi and top decentralized trading protocols differ?

Ciara Sun: According to the report, the spot trading volume now accounts for about 15.97 percent of total trading volume on Huobi (centralized exchanges). On decentralized exchanges, though, spot trading volume accounts for about 76.80 percent of the total trading volume.

Centralized exchanges have been around for a long time and have a large user base, and their spot-to-derivatives trading volume ratio should be a reasonable level for the market. So, the volume of decentralized derivatives trading will increase.

U.Today: What about daily trading volumes?

Ciara Sun: The daily trading volume chart on the second page of the report shows that the trading volume in Huobi derivatives increases and decreases in parallel with the spot trading volume. However, in the decentralized trading system, the trading volume of dYdX (derivatives) does not correlate with that of Uniswap (spot). Therefore, according to the daily trading volume, the development of decentralized perpetual swaps is still very early.

U.Today: What are the key indicators of existing decentralized derivative protocols? Can you give me some examples of how they differ?

Ciara Sun: The first is leverage, where greater leverage means greater potential gains and losses.

Contract traders, especially day traders, will use great leverage to magnify gains. dYdX, Perpetual Protocol and DerivaDEX support 5x, 10x and 25x leverage respectively. However, centralized exchanges support at least 50x leverage. Therefore, these decentralized perpetual swaps are currently not good enough for many traders.

Second is liquidity. Centralized exchanges all use order book to put together orders. dYdX and DerivaDEX use the traditional order book to aggregate orders and only settle onchain, while the remaining three protocols use AMM to aggregate orders. Order book requires sufficient market makers to obtain good liquidity, while AMM requires a balance of liquidity mining and project development to maximize liquidity. A detailed discussion can be found in the report.

In general, none of the current decentralized perpetual protocols are comparable with a centralized exchange in terms of liquidity.

U.Today: Is there a big difference between on-chain data on centralized exchanges and decentralized perpetual swap protocols?

Ciara Sun: Yes. From the user side, for centralized exchanges, the on-chain part happens only when the user deposits and withdraws tokens. On the other hand, for decentralized perpetual protocols, every step in a transaction (opening, matching, closing) happens on-chain.

U.Today: Thus, according to the information we just discussed, decentralized perpetual swaps are currently limited by their lack of liquidity and network efficiency and are therefore not applicable to many traders. What does this mean for users? What should we expect from this area in the future, and what can companies do to improve these characteristics?

Ciara Sun: This means that, currently, no one but DeFi enthusiasts and liquidity mining participants will use decentralized perpetual swaps. When liquidity and network performance issues are resolved, those who require higher levels of financial security (or who do not trust centralized exchanges) may be more comfortable using decentralized exchanges. For the project team, improving liquidity and migrating to a Layer 2 network is a priority.