Decentralized derivatives protocols, as an important innovation in the decentralized finance (DeFi) space, are gradually changing the operational model of traditional financial derivatives markets. They eliminate the reliance on centralized intermediaries by leveraging blockchain technology and smart contracts, providing users with a transparent, secure, and globally accessible trading environment. This article will conduct an in-depth analysis of eight representative decentralized derivatives protocols—Hyperliquid, Jupiter, Drift, GMX, Vertex, Apex, SynFutures, and dYdX—covering the definition and characteristics of decentralized derivatives protocols, their operational mechanisms, introductions and features of each project, comparative analysis, and future outlook for this sector. The aim is to provide readers with a comprehensive and objective perspective to help understand this rapidly evolving crypto finance space.

1. Understanding Decentralized Derivatives Protocols

1.1 Definition

Decentralized derivatives protocols are financial instruments based on blockchain technology that allow users to trade derivatives without the need for traditional centralized intermediaries. Derivatives are financial contracts whose value is derived from the price fluctuations of underlying assets (such as BTC). Decentralized derivatives protocols utilize smart contracts to automate trade execution, settlement, and clearing processes, operating on public blockchain networks to ensure that rules are transparent and immutable.

Unlike centralized exchanges (such as Binance or Coinbase), decentralized derivatives protocols do not rely on a single entity to manage user funds or match trades; instead, they achieve decentralized market operations through distributed networks and algorithms. Perpetual futures are currently the most popular product type within decentralized derivatives protocols, allowing users to leverage bets on the price movements of crypto assets without an expiration date.

1.2 Characteristics

Decentralized derivatives protocols have the following core characteristics:

• Decentralization: There is no centralized controlling entity; all trades are completed directly on the blockchain, reducing single points of failure and censorship risks.

• Transparency: Transaction records and contract terms are stored on the blockchain, publicly accessible for verification of trade fairness.

• Security: User funds and data are protected through smart contracts and cryptographic techniques, reducing the risk of hacking or internal fraud.

• Accessibility: Global users can participate with just a crypto wallet, without the need for KYC (Know Your Customer) or permission from traditional financial systems.

• Innovation: Supports a variety of financial products, such as perpetual contracts, options, and synthetic assets, providing users with flexible trading strategies.

These characteristics make decentralized derivatives protocols appealing not only to retail traders but also increasingly to institutional investors.

2. Operational Mechanisms of Decentralized Derivatives Protocols

The operation of decentralized derivatives protocols relies on blockchain technology and various market mechanism designs to achieve liquidity provision, price discovery, and trade execution. Below are several common operational mechanisms:

2.1 Automated Market Maker (AMM)

Automated Market Makers (AMM) replace traditional buy and sell order matching with algorithms and liquidity pools. Users deposit assets into liquidity pools, and the funds in the pool automatically adjust prices based on preset mathematical formulas (such as the constant product formula). The advantage of AMMs is that trades can be completed without waiting for a counterparty, making them suitable for markets with lower liquidity.

• Representative projects: Jupiter, GMX.

• Advantages: Simple and efficient, suitable for small trades and highly volatile markets.

• Disadvantages: May experience slippage, and price discovery efficiency is lower than that of order books.

2.2 Order Book Model

The Order Book Model is similar to traditional financial exchanges, where buyers and sellers submit limit orders that are matched by the system. This mechanism is widely used in centralized exchanges but needs to address on-chain transaction speed and cost limitations in decentralized environments.

• Representative project: Hyperliquid.

• Advantages: Provides more precise price discovery, suitable for professional traders.

• Disadvantages: High on-chain performance requirements may lead to trade delays or high fees.

2.3 Hybrid Model

The hybrid model combines the advantages of AMMs and order books, attempting to find a balance between liquidity and trading efficiency. For example, a protocol may use AMMs to provide base liquidity while optimizing price discovery through an order book.

• Representative project: Vertex.

• Advantages: Highly flexible, adaptable to various market conditions.

• Disadvantages: Higher implementation complexity, user experience may not be uniform.

2.4 On-chain/Off-chain Hybrid

Some protocols execute order matching off-chain to improve speed while managing settlement and funds on-chain to ensure security. This approach leverages the efficiency of centralized systems while retaining the trust mechanisms of decentralization.

• Representative project: dYdX (V4).

• Advantages: Fast trading speeds and low fees.

• Disadvantages: Off-chain components may introduce a degree of centralization risk.

3. Current Status of the Decentralized Derivatives Protocol Sector

Source: https://dune.com/uwusanauwu/perps

Centralized trading platforms have long dominated perpetual contract trading due to high liquidity and stable trading experiences. dYdX, as an early leader in decentralized perpetual contract trading platforms, has captured a certain market share in the decentralized perpetual contract market with its innovative order book model, becoming a pioneer in the market.

With the popularization of decentralized finance, user demand for decentralized trading has gradually increased. Emerging platforms like GMX, utilizing the AMM model and liquidity pool mechanisms, provide simple and efficient trading experiences, attracting a large number of users and funds. Jupiter has emerged as an important decentralized derivatives protocol within the Solana ecosystem. In 2023, market competition intensified further, with the emerging platform Hyperliquid gaining prominence due to its high performance and low-latency trading experience, attracting a large number of professional traders and gradually becoming a market leader. Meanwhile, dYdX's market share has begun to decline, partly due to the rapid rise of competitors and challenges faced during its migration to the Cosmos ecosystem.

Source: https://defillama.com/perps/hyperliquid

As of March 20, the 24-hour trading volume of decentralized perpetual contracts reached $9.4 billion, with Hyperliquid's market share in decentralized derivatives protocols reaching 63%, ranking 15th in trading volume among centralized exchanges.

Source: https://defillama.com/perps

4. Overview of Representative Projects

4.1 Hyperliquid

• Introduction: Hyperliquid operates entirely on its own Layer 1 blockchain using an order book model. It provides liquidity and clearing support through its official HLP treasury. Users can deposit funds into HLP and share in the revenue from trading fees, funding fees, and clearing fees. HLP essentially acts as a counterparty for some trades. Hyperliquid's TPS (200,000) and low latency (0.2 seconds) processing capabilities are close to CEX levels. The maximum leverage supported by Hyperliquid is 50x, but due to a mysterious whale's liquidation arbitrage operation on March 12, which resulted in a loss of approximately $4 million for HLP, Hyperliquid announced a reduction of the maximum leverage for BTC and ETH to 40x and 25x, respectively.

• Features:

• Gas-free trading, reducing user costs.

• Dedicated blockchain design, ensuring on-chain transparency and high throughput.

• Currently the largest decentralized perpetual trading exchange by trading volume.

• Suitable scenarios: Suitable for professional traders seeking low costs and high efficiency.

4.2 Jupiter

• Introduction: Jupiter is a DEX aggregator based on Solana that also supports decentralized perpetual contract trading, offering up to 100x leverage. The Jupiter liquidity provider (JLP) pool acts as a counterparty for traders. When traders open leveraged positions, they borrow tokens from this pool, with 75% of the fees generated from trades distributed to liquidity providers. Currently, only five assets are supported: SOL, ETH, WBTC, USDC, and USDT.

• Features:

• Utilizes Solana's speed and low fees to provide an experience close to centralized exchanges.

• Supports a variety of trading pairs and leveraged trading.

• Deeply integrated with the Solana ecosystem, attracting a large number of ecosystem users.

• Suitable scenarios: Suitable for Solana ecosystem users and novice traders.

4.3 GMX

• Introduction: GMX is a multi-chain decentralized perpetual exchange deployed on Arbitrum and Avalanche, using the AMM model and offering up to 100x leverage, currently supporting 67 perpetual contracts. It provides liquidity through community-owned multi-asset liquidity pools (GLP pool). Liquidity providers can earn GLP tokens by staking a single asset, representing their stake in the pool. Platform fees come from user swaps and leveraged trades, with 30% rewarding GMX stakers and 70% distributed to GLP holders. GMX V2 replaces the GLP pool with isolated GM pools and incentivizes through funding fees, borrowing fees, trading fees, and price impact.

• Features:

• Liquidity pool design allows users to earn returns by providing liquidity.

• Low trading fees (0.05%-0.07%), with part of the fees distributed to liquidity providers.

• Strong TVL performance, demonstrating user trust in its liquidity.

• Suitable scenarios: Suitable for traders looking to profit through liquidity mining.

4.4 dYdX

• Introduction: dYdX was established in 2018, initially operating on Ethereum Layer 2 (supported by StarkWare), but migrated to its own blockchain, dYdX Chain, based on the Cosmos SDK and Tendermint proof-of-stake consensus protocol in 2023. The V4 on-chain/off-chain hybrid model enhances speed through off-chain order matching while ensuring security through on-chain settlement. Order matching is completed off-chain by validators and stored in a memory order book, with settlement executed on-chain. There are no gas fees for placing or canceling orders, and fees are only charged when orders are filled, reducing trading costs.

• Features:

• The V4 version introduces a decentralized off-chain order book and on-chain settlement.

• Supports up to 20x leverage and 199 assets.

• Low trading fees (0.02% maker, 0.05% taker), attracting high-frequency traders.

• Suitable scenarios: Suitable for users seeking high leverage and a professional trading experience.

4.5 Vertex

• Introduction: Vertex is a multi-chain decentralized exchange that combines centralized limit order book (CLOB) and AMM hybrid models, integrating order book and automated market maker (AMM) mechanisms. Its order book employs a price/time priority algorithm to ensure orders are executed at the best price, regardless of whether quotes are provided by AMMs or market makers.

• Features:

• Layer 2 technology reduces fees and MEV (miner extractable value) risks.

• Supports up to 20x leverage and 54 assets.

• Emphasizes institutional-grade trading experience.

• Suitable scenarios: Suitable for professional traders requiring efficient order matching.

5. Opportunities and Challenges for Decentralized Derivatives Protocols

Decentralized derivatives protocols, as an important branch of DeFi, are in a phase of rapid development. Market growth, technological advancements, and global accessibility provide ample room for development, but challenges such as regulatory uncertainty, technological risks, and insufficient liquidity cannot be ignored.

Opportunities

• Market growth potential: As the cryptocurrency market matures and institutional investors participate, the demand for derivatives trading continues to grow. Decentralized protocols, with their transparency and security, are expected to attract more users and capture market share from centralized exchanges.

• Technological advancements driving growth: Layer 2 solutions (such as Arbitrum, Optimism) and high-performance public chains (such as Solana, Sui) significantly enhance trading speed and reduce costs. For example, Hyperliquid achieves 20,000 transactions per second through its Layer 1 blockchain, approaching centralized exchange performance. In the future, the maturation of cross-chain technology and interoperability protocols will further facilitate asset flow and market expansion.

• Innovative products and services: Decentralized protocols can quickly launch a variety of financial products, such as perpetual contracts, synthetic assets, and options, to meet user needs. In the future, protocols may expand into traditional financial derivatives markets, further broadening market coverage.

• Community governance and participation: Decentralized governance models (DAOs) enhance user engagement and loyalty. For example, dYdX implements community decision-making through the dYdX DAO, allowing users to vote on protocol development. This model not only increases user stickiness but also promotes healthy ecosystem growth.

• Global accessibility: Decentralized protocols do not require identity verification (KYC), allowing global users to participate with just a crypto wallet, greatly expanding market size. This feature provides financial freedom and opportunities for users, especially in regions with inadequate traditional financial services.

Challenges

• Regulatory uncertainty: Significant differences in regulatory policies across countries and regions may limit the development of protocols, posing legal risks to protocol operations and token issuance. Protocols need to seek a balance between decentralized ideals and compliance requirements, increasing operational difficulties.

• Technological risks and security vulnerabilities: Smart contract vulnerabilities and blockchain network congestion are major risks. For example, the recent Hyperliquid liquidation incident resulted in a loss of approximately $4 million, highlighting the threat of technological risks. Additionally, network congestion may lead to trade delays and high fees, affecting user experience.

• Insufficient liquidity: Compared to centralized exchanges, decentralized protocols generally support fewer assets and have lower liquidity, especially in long-tail asset markets. Fragmented liquidity may lead to significant slippage and low price discovery efficiency.

• Intensifying competition: As more protocols enter the market, competition is becoming increasingly fierce. For example, Hyperliquid leads with high performance, but Jupiter and Vertex are also making strides in technological innovation. Protocols need to continue innovating to maintain a competitive edge, or they may face user attrition.

6. Conclusion

Decentralized derivatives protocols, as an important innovation in the DeFi space, are reshaping the traditional financial derivatives market through blockchain technology and smart contracts, providing users with a transparent, secure, and globally accessible trading experience. Hyperliquid stands out among many protocols with its high-performance Layer 1 blockchain, gas-free order book model, and trading speed and experience close to centralized exchanges, becoming a market leader. dYdX and GMX, as mature players, maintain competitiveness based on their strong user base and TVL, while Jupiter and Vertex showcase potential through ecosystem integration and technological innovation. However, compared to centralized trading platforms, decentralized derivatives protocols are still limited by a smaller variety of assets, blockchain network performance bottlenecks, and insufficient liquidity. Looking ahead, as Layer 2 technology, high-performance public chains advance, and user demand grows, this sector is expected to further challenge the position of centralized exchanges by launching more innovative products, optimizing user experiences, and gradually adapting to regulatory requirements, driving the continuous evolution of the crypto finance ecosystem.

About Us

Hotcoin Research, as the core investment research hub of the Hotcoin ecosystem, focuses on providing professional in-depth analysis and forward-looking insights for global crypto asset investors. We build a "trend assessment + value discovery + real-time tracking" integrated service system, offering in-depth analysis of cryptocurrency industry trends, multi-dimensional assessments of potential projects, and 24/7 market volatility monitoring, combined with weekly updates from the "Hotcoin Selected" strategy live broadcasts and daily news summaries from "Blockchain Today," providing precise market interpretations and practical strategies for investors at different levels. Leveraging cutting-edge data analysis models and industry resource networks, we continuously empower novice investors to establish cognitive frameworks and assist professional institutions in capturing alpha returns, collectively seizing value growth opportunities in the Web3 era.

Risk Warning

The cryptocurrency market is highly volatile, and investments carry risks. We strongly recommend that investors fully understand these risks and invest within a strict risk management framework to ensure the safety of their funds.