The true significance of the rise of Perp DEX: Structural transformation of on-chain derivative products

The phenomenon of derivatives trading shifting from centralized exchanges to on-chain is not merely a technical transition but signifies a redistribution of capital and power within the cryptocurrency market. At its core, this rise is driven not only by infrastructure maturity but also by the specialization of trader segments and a fundamental transformation in trust models toward protocols.

Why Perpetual Futures Are Moving from CEX to On-Chain

Traditionally, perpetual futures trading was the most profitable segment for CEXs (centralized exchanges). Through a triple cash flow absorption mechanism—trading fees, funding rates, and additional revenue from liquidation—platforms systematically extracted value from market participants. For DeFi, opening this market was not a matter of “want to” but “can be achieved.”

In the early stages, on-chain systems faced fundamental constraints. High gas fees, transaction delays, and oracle update lags meant that all leveraged products were quickly undermined by arbitrageurs. No matter how advanced the technical efforts, replicating the user experience and risk management of CEXs was impossible.

The turning point was brought about by infrastructure development after 2024. The proliferation of Layer 2 solutions and high-performance chains dramatically improved throughput and latency constraints. Simultaneously, users who experienced multiple market cycles evolved from mere “mining participants” to “professional traders sensitive to execution quality.”

Most importantly, a crisis of trust in CEXs emerged. Risks of asset freezing, potential misappropriation, and regulatory uncertainties prompted institutional investors and high-frequency traders to reconsider the costs of custody. This pressure created demand for new options like Perp DEXs.

Essentially, the rise of Perp DEXs signifies a process where cash flows generated from derivatives are redistributed from centralized entities to on-chain participants.

Fundamental Problems Solved by Perp DEX: Trust, Transparency, and Revenue Sharing

Many perceive Perp DEXs as “decentralized CEXs,” but this overlooks the core essence. Perp DEXs are not merely replicating existing systems; they are reconstructing the fundamental logic of derivative trading.

First is the change in trust models. In Perp DEXs, user funds are always custodyed by smart contracts, making arbitrary misappropriation by protocols impossible. Risk management logic, margin calculations, and liquidation mechanisms are fully transparent and auditable by anyone. This shifts dependency from “trust the platform” to “verify the rules themselves.”

Second is transparency in price setting. CEXs’ stop-loss, mark prices, and funding rates are inherently black boxes. On-chain, these parameters are explicitly defined by smart contracts, allowing anyone to verify market liquidation rules and rebalancing methods in advance.

Third is democratization of revenue structures. Perp DEXs do not concentrate all trading revenues at the protocol level but return derivatives-generated cash flows to users via LPs, vaults, governance tokens, etc. This provides traders with the opportunity to become “owners of the protocol” simultaneously.

From this perspective, Perp DEXs are not just trading frontends but are essentially on-chain risk management systems.

Evolution of Mechanisms and Qualitative Changes in Traders

The development of Perp DEXs follows a clear trajectory of specialization. Early protocols adopted vAMM models, solving the cold start problem with virtual liquidity pools. However, limitations such as slippage on large trades and dependence on arbitrageurs emerged.

As trading volume increased, order book models were gradually introduced. On-chain (or semi-on-chain) order books enabled market makers to directly place limit orders, dramatically improving price discovery. In practice, many protocols opt for compromise solutions—off-chain matching combined with on-chain settlement, or AMM with limit orders—balancing decentralization and trading performance.

Crucially, behind these models, liquidity providers (LPs) bear substantial risks. LPs essentially trade against all traders, earning fees and funding rates while also taking on market direction risk. If protocol design is inadequate, long-term profits for professional traders ultimately translate into LP losses.

Therefore, mature Perp DEXs invest heavily in liquidation mechanisms, insurance funds, and parameter tuning. Liquidation is not punishment but a necessary condition for system stability. Protocols capable of rapid and accurate liquidation during extreme market conditions are the ones that will survive long-term.

The Limit of Specialization Seen in Hyperliquid: The Future of On-Chain Perp

While most Perp DEXs start from “how to replicate CEX experience in DeFi,” Hyperliquid’s approach is entirely different. Instead of simply hosting “Perp” on existing chains, it has redesigned the entire infrastructure specifically for the highly specialized use case of perpetual futures.

Hyperliquid’s decision to develop its own L1 chain is bold but logically clear. It involves a trade-off: sacrificing general-purpose flexibility to gain specialization for matching efficiency, latency, and risk management. This inherently targets mid-to-high frequency traders who are extremely sensitive to execution quality, slippage, and capital efficiency, rather than general DeFi users.

In terms of trading mechanisms, Hyperliquid employs a full on-chain order book rather than vAMM or semi-off-chain matching. This means the price discovery process resembles traditional derivative exchanges, demanding high system performance, liquidation engine robustness, and risk management. Hyperliquid pre-constructs liquidation and risk management at the system level, making behavior during extreme markets more predictable.

From on-chain data, the most insightful metric is not a single indicator but the “inter-relationship” among multiple indicators. As seen on DefiLlama, Hyperliquid maintains a consistently high “daily trading volume / TVL” ratio. This is not a result of inflated trading volume or liquidity waiting for subsidies but a clear signal of high-frequency, high-intensity usage. High capital efficiency often indicates high trader quality.

Furthermore, analyzing active user structures via Dune reveals that Hyperliquid’s daily and weekly active users do not spike temporarily during airdrops or campaigns but follow relatively smooth and continuous curves. This pattern suggests “ongoing tool utilization” rather than “mining participation,” which is a crucial distinction for investment analysis.

Combining with Nansen to observe large account behaviors, the true entry barriers of Hyperliquid become more apparent. There are consistently professional accounts participating, and their trading behaviors show strategic coherence rather than one-off actions. This indicates that what is happening on Hyperliquid is not “user trial recruitment” but “migration of major traders to a primary trading venue.”

In the long term, the risks for Hyperliquid lie not in the product form but in the difficulty of this route. Maintaining high-performance chains, order books, and professional traders imposes extremely high demands on operations, risk management, and system stability. However, once this flywheel starts spinning, user retention and migration costs will far surpass those of typical Perp DEXs.

Data Framework for Assessing Health

Perp DEX investment analysis benefits from a relatively clear evaluation framework. The relationship between trading volume and TVL reflects capital efficiency, and comparing overall trader profit/loss with LP revenue indicates whether risk management functions effectively. Stability in funding rates and the dispersion of liquidations often serve as more important signals than daily trading volume.

Additionally, active trader counts and protocol revenue structures provide insights into whether the platform is establishing genuine user retention rather than just short-term incentives.

“Consistently high daily trading volume / TVL ratio,” “smooth active user curves,” and “strategic coherence in large trader behavior” form a composite signal indicating sustainable health.

Risks and Suitability Diagnostics Before Entry

Many risks stem not from leverage itself but from system details. Oracle delays can be amplified during extreme markets, liquidity can evaporate instantly during high volatility, and delays in governance parameter adjustments can trigger chain reactions.

These “low-frequency, high-impact” risks rarely manifest daily but can be catastrophic once they occur. Understanding these risk structures is essential before using Perp DEXs.

Perp DEXs are suitable for traders with clear risk management awareness and are not suitable for those relying on emotional manipulation. On-chain trading requires full responsibility for one’s positions, with no customer support or human intervention. Moderate leverage and explicit stop-loss strategies are fundamental survival rules for on-chain trading.

For LP participants, the same applies: this is not “risk-free yield” but a “passive market-making strategy.” Earning fees and bearing downside risk during market swings are two sides of the same coin.

The Fundamental Meaning of Perp DEX and Future Outlook

Over the past few years, the evolution of the perpetual futures DEX ecosystem cannot be explained simply as “growth” but rather as a systemic restructuring of trading architecture and market share.

If 2021–2023 was a period for validating product feasibility and educating users, then from 2024 onward, the focus has shifted to an era where “efficiency rules everything.” Market interest is rapidly shifting from “Can decentralized perpetual futures be realized” to “Which architecture can support professional-level trading in the long term.”

The ultimate significance of the rise of Perp DEXs is the democratization of power structures in the derivatives market and the construction of direct value return mechanisms to participants. This is not just a technological evolution but a fundamental paradigm shift in the financial system. As positive cash flows are established and professional traders continue to settle in, Perp DEXs will function not as a short-term narrative but as a true financial infrastructure.