On CeFi (FUD), Perpetuals and DeFi

Picture this — It’s November 2022, CeFi’s favorite poster child and the savior of centralized finance FTX goes bankrupt. The unprecedented but serious loss of $26 billion sent shockwaves in our ecosystem and reduced centralized exchange volumes over the next half year by almost 40%.

The inevitable shifts allowed decentralized exchanges to absorb some of that volume, with Uniswap surpassing Coinbase’s monthly trading volume in March 2023, and DEX to CEX spot volumes doubling form September 2022 lows.

Rise of DEX Volumes vs CEX Volumes: From 7.3% in Sep 2022 to 15.2% in May 2023 (Source: The Block)

With increased regulatory scrutiny from the SEC as well as the banking crisis triggered by the fall of SVB, it’s fair to say that we’ve found ourselves in the depth of a crypto winter, where defending the viability of DeFi becomes harder. Unless, there was a glaring outlier.

The cool kid on the block(chain): Perpetuals

While DeFi perpetual futures (“perps”) have existed for the past ~3 years, the market saw a major boom in the latter half of 2022, as DeFi perps absorbed the latent demand left by the self-destruction of major CEXs like FTX.

Volume Boom: DEX Futures Volume compared to CEX Futures rose by 62% from Oct. 2022’s 1.08% to 1.75% in April 2023 (Source: The Block)

Decentralized Perps, short for decentralized perpetual contracts, refer to a type of financial instrument that operates on decentralized blockchain networks. Perpetual contracts are derivatives that allow traders to speculate on the future price movement of an underlying asset, without actually owning the asset itself.

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Perpetuals allow trades without an expiry date (unlike traditional futures contracts which have a set expiry date). This allows traders to hold a position for as long as they want, provided they can afford the fees. Traders can also leverage their positions, meaning they can essentially borrow money to trade more than their account balance. This can increase potential returns, though it also increases potential risks. As seen below, perpetuals are by far the most traded instrument for cryptocurrencies, well surpassing even spot trading volumes. Overall, crypto derivatives now represent 80% of all crypto trading volumes, the highest they’ve ever been in their short history.

Crypto derivatives volumes as a % of total crypto trading volumes reach 80%. (Source: GSR)

Because they’re decentralized and operate on blockchain networks, anyone with an internet connection and a digital wallet can access these markets, a big win for financial inclusion. Finally, with deep liquidity and presence across multiple markets and chains, perps offer a strong alternative to spot trading for professional traders and degens alike. Today, DeFi perps contribute to only ~2% of CeFi perps volumes, representing >50x whitespace even in the depth of a bear market. DeFi perps also represent the highest revenue-generating segments of DeFi. For e.g, even after their peak in August 2022 when Perps grabbed 2 out of 8 highest fee-generating defi protocol spots, GMX and Synthetix still command top 10 spots respectively, with both protocols dominating revenues on their respective Ethereum L2s (Arbitrum and Optimism).

Rise of the Perps: $GMX and Synthetix occupy strong fee thresholds even in a Bear Market (Source: Cryptofees)

But what about the (remaining) CEXes?

In June 2023, the U.S. Securities and Exchange Commission (SEC) launched lawsuits against top crypto exchanges, Binance and Coinbase, initiating significant transformations within the crypto industry. These platforms were accused of operating as unregistered exchanges, with Binance facing further allegations of maliciously using customer funds. The SEC is intent on regulating cryptocurrencies as securities, similar to how it oversees the equities market, despite the unique nature of crypto assets. With uncertainty rocking the CEX landscape, there is bound to be a shift towards permissionless derivative protocols, much like after FTX’s fall out in November 2022. We are here to build for this “slow, but sure” shift, and believe it’s only a matter of time before DeFi perpetuals reach the broader world.

In Perps We Trust: The Decentralized Dream at Veranta

DeFi perpetuals have cumulatively crossed $200B in trading volumes, but this still only represents ~2% of CeFi derivatives volumes. There are very good reasons for this, ranging from regulation, ease of use (UI / UX), architecture (scalability) and asset pair selection. At Veranta, we are not chasing short-term narratives, as the biggest whitespace exists in derivatives, where DeFi is already ~50–100x behind CeFi. We’re building for the long haul to systematically address DeFi’s challenges, and get caught up to CeFi’s ease of use, liquidity, fees, speed, and regulatory advantages.

To perfect the decentralized dream, we need to enable any individual to be a sophisticated on-chain market maker, and make access to perps fun, safe and friendly — that’s the mission we’ve set ourselves at Veranta. With fine-grained risk management for LPs, embedded wallets, trading gamification and a focus on the Optimism Superchain (Base, Optimism), something cool is brewing under the hood — join our journey and follow Veranta to stay updated.