Introduction

Decentralized finance, commonly known as DeFi, is a transformative force in the world of cryptocurrencies. Within this growing ecosystem, Perpetual DEXes have emerged as a significant player. These Decentralized Exchanges (DEXes) introduce traders to perpetual contracts, which are financial derivatives that mirror spot trading but do not have an expiration date. Therefore, understanding the mechanics of Perpetual DEXes is crucial for anyone looking to master the DeFi realm.

So, why focus on the intricacies of Perpetual DEXes? Well, the answer lies in their dual promise of opportunity and challenge. These platforms offer traders leverage, flexibility, and the ability to profit from market dynamics, all while operating in a decentralized manner. However, in order to optimize these platforms, it is important to have a thorough understanding of their foundational principles.

Enter Velar's pioneering ambition. In a move that redefines industry standards, Velar is embarking on the development of the first-ever Perpetual DEX on Bitcoin. Notably, this is not just another perpetual DEX. Velar is leveraging Stacks L2, a layer 2 scaling solution, to bring sophisticated trading functionalities to Bitcoin. This initiative not only amplifies the versatility of Bitcoin but also underscores Velar's commitment to exhaustive research. It's a testament to the emphasis on providing the community with a system that embodies efficiency and innovation.

As we embark on this journey into the Perpetual DEX realm, join us in dissecting their mechanics, surveying leading platforms, and appreciating Velar's trailblazing endeavor.

Basics of Perpetual Contracts

1. Definition and Purpose:

At the heart of every Perpetual DEX lies the perpetual contract. Distinct from traditional futures contracts, perpetual contracts don't have a predetermined expiration or settlement date. This design allows traders to maintain positions indefinitely, provided they meet maintenance margin requirements.

Originating in the cryptocurrency realm, perpetual contracts serve multiple purposes:

• Leverage: These contracts allow traders to take positions larger than their account balance. With this increased buying power, traders can amplify potential profits, but it's vital to note that losses can also be magnified.

• Flexibility: Without an expiration date, traders aren't bound by the pressure of a closing date. They have the liberty to strategize long-term positions or capitalize on short-term market movements.

2. Comparison with Spot Trading:

Spot trading involves the direct purchase or sale of an asset, be it a cryptocurrency or a commodity. The transaction is immediate, straightforward, and ownership of the asset is transferred. Perpetual contracts, on the other hand, represent an agreement to trade an asset at a future date, but the distinctive lack of a set date brings its nuances.

Here's how the two compare:

• Settlement: Spot trades are settled instantly, resulting in immediate ownership transfer. Perpetual contracts, conversely, settle profits and losses continuously without the need for an actual asset transfer.

• Capital Requirement: Spot trading requires the full value of the asset upfront. In contrast, perpetual contracts demand only a margin, allowing traders to command larger positions with a fraction of the capital.

• Risk Profile: While spot trading has a straightforward risk tied to the asset's price, perpetual contracts introduce leverage, which can both boost profits and exacerbate losses.

  
  

Core Mechanics of a Perpetual DEX

1. Funding Rate Mechanism:

The funding rate mechanism is pivotal in ensuring that the price of the perpetual contract aligns with the underlying asset's spot price. This alignment is critical since perpetual contracts lack an expiration date, which in traditional futures markets serves as a natural point of alignment.

• How It Operates: Every predefined interval, a funding payment is exchanged between long and short position holders. If the contract trades at a premium to the spot price, long position holders pay the shorts. Conversely, if it trades at a discount, shorts compensate the longs.

• Implication for Traders: This mechanism ensures that traders are incentivized to bring the contract price in line with the spot market. However, it also introduces a variable cost or income to maintaining a position, especially during volatile market periods.

2. Auto-Deleveraging:

Auto-deleveraging kicks in when the liquidation process fails to cover system losses. While it acts as a safety net for the system, it can be less favorable for traders.

• The Process: If a position is liquidated but not fully closed in the market, opposing traders are impacted. Starting with the most leveraged positions, they are reduced or closed to balance the system.

• Trader's Perspective: While ensuring platform solvency, it introduces an added risk. Traders with high leverage, especially in volatile conditions, are more susceptible.

3. Insurance Fund:

The insurance fund acts as a buffer, safeguarding against system insolvency when liquidation falls short.

• How It's Funded: Portions of trading fees or leftover margin from liquidated positions typically contribute to the insurance fund.

• Role in Risk Management: Should a liquidation not cover the outstanding debt, the insurance fund steps in, preventing the need for auto-deleveraging.

4. Partial Liquidation:

A more nuanced approach to liquidation, partial liquidation, aims to mitigate the market impact of large liquidations.

• Mechanism: Rather than entirely liquidating a position, the system liquidates it in parts. This strategy reduces market impact and potentially allows traders to recover if market dynamics shift favorably.

• Advantage for Traders: It offers a softer landing in unfavorable market moves, reducing the immediacy of full position closure and offering a potential path to recovery.

These mechanics provide the foundational structure and safety nets ensuring Perpetual DEXes function seamlessly and remain solvent. They represent a balance between platform stability and trader opportunity. As we progress, we'll spotlight specific DEXes to understand how these mechanics manifest in real-world platforms.

Spotlight on Prominent Perpetual DEXes

1. dYdX:

Emerging as one of the prominent players in the decentralized perpetual market, dYdX brings forth a blend of sophistication and user-friendliness.

• Core Mechanics: Harnessing the power of the funding rate mechanism, auto-deleveraging, and an insurance fund, dYdX maintains system stability and alignment with spot markets.

• Unique Offerings: The integration with StarkWare's layer 2 solution is noteworthy, ensuring enhanced scalability and reduced transaction fees. Furthermore, its platform elegantly straddles between margin trading and perpetual contracts, catering to diverse trader needs.

2. Gains Network:

Positioning itself with a distinct mobile-first approach, Gains Network resonates with the new-age trader on-the-go.

• Mechanics Insight: While details about its underlying mechanics might not be as extensively documented, the common themes of funding rates and liquidation processes likely apply.

• Defining Attributes: Apart from its mobile-centric design, Gains Network accentuates community interaction. Through trading competitions and airdrops, it fosters a robust user engagement dynamic.

3. GMX (Gambit):

GMX underscores the blend of capital efficiency and minimal slippage in trades, setting itself apart in the Perpetual DEX arena.

• Mechanics at Play: With its foundation on the funding rate mechanism complemented by an insurance fund, GMX ensures price alignment and risk mitigation.

• Standout Features: Its integration with Arbitrum elevates scalability and reduces fees. Additionally, the staking rewards system, where stakers earn a slice of the trading fees, offers an enticing proposition for users.

4. Perp Protocol:

In the world of Perpetual DEXes, Perp Protocol emerges as a beacon of innovation, thanks to its vAMM model.

• Innovative Mechanics: The vAMM (virtual Automated Market Maker) model removes the need for liquidity providers and curtails the challenge of impermanent loss, a prevalent issue in traditional AMMs.

• Distinctive Advantages: Operating on the xDai chain, Perp Protocol users enjoy swift transactions and diminished fees. Furthermore, the staking prospects for its native token, PERP, enhance its allure.

  
  

Comparison of Prominent Perpetual DEXes:

Velar – Pioneering Perpetual DEX on Bitcoin

1. Innovation at Its Core:

In the ever-evolving landscape of DeFi, Velar stands out with its audacious mission: crafting the first-ever Perpetual DEX on Bitcoin. This venture isn't a mere foray into the Bitcoin network; it's a paradigm shift. Velar, by leveraging Stacks L2, seeks to superimpose complex trading functionalities atop the solid foundation of the Bitcoin blockchain. It's a convergence of Bitcoin's unmatched security and the dynamism of decentralized trading platforms.

2. The Importance of Research:

Such groundbreaking ventures mandate comprehensive research. Velar recognizes the diverse mechanics underpinning existing Perpetual DEXes. By meticulously studying these systems – from their core mechanics to unique offerings – Velar is committed to delivering a platform that embodies both robustness and innovation. The end goal is unambiguous: provide the community with an unparalleled trading experience.

3. Engaging the Community:

The journey of Velar is not a solitary endeavor. Community feedback, insights, and engagement are pivotal. As Velar shapes its platform, the community's role is multifaceted – from refining features to stress-testing the system. Velar's vision extends beyond just building a platform; it's about fostering a vibrant ecosystem where every member contributes to and benefits from the platform's evolution.

Velar's initiative, coupled with its commitment to rigorous research and community engagement, positions it at the vanguard of Perpetual DEX innovation. As we anticipate the platform's unveiling, the promise of a Perpetual DEX on Bitcoin, powered by Stacks L2, marks a momentous milestone in decentralized finance.

Conclusion:

In the fast-paced world of decentralized finance, Perpetual DEXes stand as a testament to the blend of innovation, flexibility, and trader empowerment. From understanding their core mechanics to evaluating the unique offerings of prominent platforms, the realm of perpetual contracts offers both opportunities and challenges.

Velar's monumental endeavor to introduce a Perpetual DEX on Bitcoin, leveraging Stacks L2, further accentuates the dynamic evolution of this space. As we stand on the cusp of this groundbreaking integration, the promise of decentralized perpetual trading on the world's most renowned blockchain, Bitcoin, is not just a novelty but a significant stride in DeFi's journey.

Engage with Us:

We invite all readers to be a part of this transformative phase in decentralized finance. Share your insights, expectations, and feedback regarding Perpetual DEXes and Velar's initiative. Your perspective is invaluable in shaping the future of DeFi.

For more deep dives, insights, and updates, especially on Velar's progression, ensure you stay connected with us. Engage directly with our community and team on Discord and follow our updates on X (formerly Twitter) at @VelarBTC.