Thread by @MTorygreen

What #defi narrative has a $1 QUADRILLION-dollar potential?

Decentralized perpetuals are a nobel-prize worthy innovation, and protocols like $GMX, $DYDX, $GNS, $PERP, $VELA, $WOO and $LVL are leading the way

Here are the 7 things you need to know to master this market

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This thread will cover the following:

• What are derivatives?

• What are perpetuals?

• What makes them unique?

• What are decentralized perps?

• How big is the market for decentralized perps?

• Who are the key players?

• What is the long-term potential?

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🔶 What is a derivative?

Derivatives are financial instruments that derive their value from an underlying asset such as a stock, bond, commodity, market index or currency

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Two common types of derivatives are options and futures

• Options give their owner the RIGHT to buy or sell an asset at an agreed upon price and date

• Future OBLIGATE their owners to buy or sell an asset at an agreed upon price and date

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Derivatives have many practical uses, including:

• Hedging: A farmer could buy a corn future to “lock in” the price of corn at the time of sale

• Speculation: Traders can bet on whether an asset will go up or down

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Derivatives are HUGE in the traditional financial world and have an estimated value of $1 Quadrillion

That’s > 10x the value of the world’s stock markets!

Most traditional derivatives are traded on conventional exchanges like the Nasdaq or Chicago Mercantile Exchange (CME)

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🔶 What are perpetuals?

Derivatives are also popular in crypto, with an estimated market capitalization of $2 Trillion (and almost $5 Trillion in the 2021 bull market)

Although crypto derivatives come in many forms, one of the most popular is known as a “perpetual”

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A perpetual is a special type of futures contract

Like all futures, they obligate the owner to buy the asset at some point in the future

Unlike traditional futures, however, perpetuals DON’T have an expiration date, which means that they can be held indefinitely

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🔶 What makes perpetuals so unique?

#Perps are a groundbreaking innovation because they combine the best features of the derivative and spot markets:

• The ability to gain leverage (derivatives)

• The ability to hold an asset long-term (spot)

Let’s look at each...

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🔹 Leverage

One of the main benefits of futures and options is that traders can take leveraged positions

Because they’re not taking ownership or custody of the actual asset, they can buy large positions with relatively small amounts of cash

This can magnify profits

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🔹 Indefinite Holding Period

Unfortunately both options & futures expire, which means that traders either have to close their positions or “roll-over” into new ones (which can be costly and time consuming)

Perpetuals eliminate this, allowing traders to hold long-term

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As such, perpetuals are the first practical way to take a long-term leveraged position

Perhaps that’s why the daily volume of perpetuals traded is often 3x that of the spot market

(and over 90% of all #crypto futures trades are perps)

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But the most interesting thing about perpetuals?

They’re #crypto native!

While the idea they were first proposed by Nobel Laureate Robert Schiller in 1992, they didn’t become practical until the introduction of cryptocurrencies, and were first launched by BitMEX in 2016

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Most #crypto perpetuals are traded on centralized exchanges such as:

• #Binance

• OKX

• Bybit

• Bitget

(FTX was a large player too before its collapse)

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🔶 What are decentralized perpetuals?

Decentralized perpetuals are perpetuals that are traded on decentralized exchanges (#DEXs)

Unlike centralized exchanges, DEXs allow users to directly trade with one another without the need for banks, brokers or other intermediaries

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This creates a variety of benefits including:

• Transparency: All transactions are visible on chain

• Censorship Resistance: Any asset can be listed

• Anonymity: No customer information is required

• Deep Liquidity: Anyone can provide liquidity to a #DEX

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🔶 Market Overview

In comparison to traditional and centralized #crypto derivatives, the market for decentralized derivatives is relatively small

It’s worth $1.47B as of February 28th, 2023

( < 0.1% of crypto derivatives and < 0.0001% of traditional derivatives!)

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Historically, the market was plagued by several factors that limited growth, including:

• High fees

• Capital inefficiencies

• Poor pricing

• General lack of the level of sophistication needed for professional users

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But this started to change in 2021

As newer, more sophisticated players entered the market, the market grew from from $68M in 2021 to $1.47B today

That’s over 2,000%!

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🔶 Key Players

Key players in the decentralized perpetuals space include:

• GMX ($GMX)

• dyDx ($DYDX)

• Gains Network ($GNS)

• Perpetual Protocol ($PERP)

• Vela Exchange ($VELA)

• Woo Network $WOO

• Level Finance ($LVL)

Let’s take a look at each…

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🔹 GMX

@GMX_IO is the largest perpetual DEX by a factor of nearly 2x

It was founded in 2021 by an anonymous team and has recorded:

• $107B of total trading volume

• $164M of open interest

• 242K total users

Its $GMX token has also increased > 2.3x in the last year

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🔹 dYdX

@dYdX is the second largest perpetual DEX by TVL

It was founded by @AntonioMJuliano in 2017 and is backed by @paradigm, @a16z and @polychain

$DYDX has over 60K users and records ~ $1.5B in trading volume, ~500K trades and holds $200M in open interest per day

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🔹 Gains Network

@GainsNetwork_io is an up-and-coming competitor

It was founded in 2021 by an anonymous developed named Seb. It has recorded:

• $30B of total trading volume

• $21M in trading fees

• 12K users

Its $GNS token has increased nearly 4x over the last year

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🔹 Perpetual Protocol

@perpprotocol has long been a favorite among crypto investors.

To date, it has recorded:

• $17B in volume

• $15M in fees

• >340K traders

While its $PERP token fell in 2022, it has recovered some and nearly doubled in the last 3 months

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🔹 Vela Exchange

@vela_exchange is a brand new exchange that was launched in 2023

The project was founded by @TravDoesDeFi and Dan Peng and has already garnered $37.9M in TVL and its $VELA token has increased nearly 5x since the beginning of the year!

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🔹 Woo Network

@WOOnetwork was founded in 2019 by Jack Tan and @kronosmark

The company offers both a zero-fee centralized exchange and a highly capital efficient DEX.

While its $WOO token fell in 2022, it has recovered some and nearly doubled in the last 3 months

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🔹 Level Finance

@Level__Finance is a perpetual DEX operating on BNB

It was founded by Raeesa Gabriels, launched in Jan 2023 and has already recorded:

• $17M TVL

• $3B total trading volume

• $3M accrued fees

The $LVL token has also ↑ ~18x in the last 2 months!

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🔶 Long-Term Potential

The opportunity for decentralized perpetuals is massive. They:

• Have several advantages over centralized exchanges

• Are growing like crazy

• Are a mere fraction of the markets for centralized #crypto derivatives and traditional derivatives

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Perhaps most importantly, the market is ripe with innovation

A new slate of rising stars such as $GMX, $DYDX, $GNS, $PERP, $VELA, $WOO and $LVL are overcoming the challenges of the past and starting to take share from centralized alternatives such as Binance

I hope you've found this thread helpful.

Follow me @MTorygreen for more fundamental analysis on Web3 protocols.

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