📊The Current State of Crypto Derivatives

The crypto derivatives market is a behemoth, with staggering figures that underscore its significance:

• Monthly trading volume: Approximately $3 trillion

• Daily trading volume: Around $97 billion

• Market share: Up to 80% of total crypto trading volume

Yet, despite these impressive numbers, a glaring issue persists: 99% of derivatives trading occurs on centralized exchanges (CEXs). The Centralization Dilemma Centralized exchanges, while popular, stand in stark contrast to the core principles of decentralized finance (DeFi). Their track record has been marred by numerous issues:

• Lack of transparency in order flow

• Allegations of frontrunning

• Custody risks

• Security breaches

• Solvency concerns

High-profile cases involving exchanges like FTX and Binance have highlighted the inherent risks of centralized systems, eroding trust among users and institutions alike.

Moreover, CEXs face mounting challenges:

• Internal risks: Opaque operations and centralized control

• External pressures: Increasing regulatory scrutiny and stringent KYC requirements

These factors are driving a shift in sentiment, pushing both retail users and institutions to seek on-chain alternatives.

The Liquidity Conundrum in Decentralized Trading

The decentralized trading market faces a persistent challenge: the liquidity-trader paradox. This circular problem can be summarized as:

• Traders gravitate towards the most liquid markets

• Liquidity flows to markets with the highest trader activity

Currently, centralized exchanges (CEXs) hold the advantage in liquidity. Rational traders, faced with lower liquidity, higher slippage, and increased fees on-chain, tend to stick with CEXs. This perpetuates the cycle, keeping CEXs as the most attractive venue for liquidity providers.

The key question becomes: How can decentralized exchanges (DEXs) like PriveX attract liquidity without an established trader base, and vice versa?

Current On-Chain Derivatives Landscape

The DeFi market currently offers three primary models for derivatives trading:

1. Order Book

2. Automated Market Maker (AMM)-based

3. Oracle-based Virtual AMM (vAMM)

PriveX introduces a novel approach to this landscape with its unique intent-based architecture, offering a potential solution to the liquidity dilemma.

1. On-Chain Order Books

Advantages:

• Peer-to-peer trading with granular liquidity control

• Market transparency

• High efficiency in fees and liquidity

• Strong internal price discovery

• Support for a wide range of assets

Challenges:

1. Limited Throughput:

2. • High-frequency order updates require significant blockchain throughput

   • Most secure/decentralized blockchains struggle to provide sufficient speed

   • Some projects attempt to solve this by creating their own Layer 1 blockchain, risking validator centralization

3. Centralization Risks:

4. • Off-chain matching engines introduce potential for front-running

   • Custom Layer 1 solutions often rely on permissioned validators

5. Market-Making and Liquidity Issues:

6. • Complex and capital-intensive market-making operations

   • Fragmented liquidity across multiple blockchains and exchanges

   • Difficulty in building deep liquidity pools

While on-chain order books continue to evolve, they currently fall short in providing a trading experience comparable to CEXs.

2. Automated Market Maker (AMM) Models

While not direct perpetual futures contracts, AMM models offer leveraged exposure to underlying assets.

Advantages:

• Utilization of existing spot-AMM liquidity

• LPs are not direct counterparties to traders

• Potential for trading long-tail assets

Challenges:

• Limited leverage due to lender capital constraints

• High costs for traders and protocols

• Credit risks for lenders

• Capital inefficiencies hindering wide-scale adoption

3. Oracle-Based Virtual AMM (vAMM) Models

Popularized by platforms like GMX, vAMM models have gained traction as an alternative to on-chain order books.

Advantages:

• Guaranteed order execution

• High leverage options

• Predictable trade slippage

Challenges:

1. Capital Inefficiency:

• Idle liquidity awaiting utilization

• Restricted open interest (OI) due to risk management concerns

1. High Costs:

• Inability to price risks adequately without price discovery

• High fees to offset LP risks

• Majority of revenues allocated to LPs rather than project stakeholders

1. Limited Asset Range:

• Difficulties in listing volatile or long-tail assets

• Severe OI restrictions and high fees for riskier assets

1. Oracle Dependency:

• Vulnerability to price and oracle manipulation

1. Fragmented Liquidity:

• Each new protocol or chain deployment requires its own liquidity pool

• Costly liquidity incentivization often at the expense of stakeholder value