A report by Huobi Research Institute has noted that the future development of on-chain cryptocurrency perpetual contracts is constrained “by the performance of their underlying public chains, with a breakthrough in the latter needed for the former to thrive.”
The report from Huobi, titled “On-chain perpetual contracts: Evaluating past performance and future prospects,” points out that the future development of on-chain perpetual contracts will be “shaped by emerging DeFi innovations and the combination of various DeFi protocols.”
First introduced by BitMEX in 2016, crypto perpetual contracts “have become a mainstay at many digital asset exchanges.” As explained in the report, they work “similarly to their traditional financial market equivalents in automatically rolling over contracts for popular digital tokens such as Bitcoin.”
When compared with the “booming” off-chain perpetual contracts, on-chain perpetual contracts “are developing at a slower pace,” the update from Huobi revealed while adding that this is because perpetual contract trading “is more sensitive to transaction speed and price fluctuations, requiring the higher performance of public chains.”
The latter is also “the biggest constraint to the development of on-chain perpetual contracts at present, lagging centralized exchanges in terms of transaction experience and depth.”
The report provides “a detailed introduction to three on-chain protocols, Perpetual Protocol which uses the virtual automatic market maker (vAMM), dYdX (off-chain match + on-chain settlement) and Injective (on-chain order book with batch auction).”
Comparing the risk response of each protocol, the report’s evaluation “shows on-chain perpetual contracts all face similar risks, including system stability risk, liquidation risk, front-running risk and protection for traders.”
While AMM show strong potential in the spot market, it is difficult for it “to meet demand in the futures market.”
According to the report, dYdX’s compromise in its solution of ‘off-chain match + on-chain settlement’ has been “a great success, because it is applicable to the current situation and makes the best use of the limited infrastructure performance.”
With no one perpetual protocol meeting all desired attributes, the on-chain order book “represented by Injective, a decentralized trading platform which uses Tendermint, appears to be the future direction of perpetual contracts’ development.”
Huobi Research Institute researcher Hugo Hou, author of the report, said:
“The development of the on-chain trading model has gone through several stages, from the early 0x protocol off-chain RFQ model to the AMM mechanism, and from the dYdX ‘off-chain match + on-chain settlement’ approach to the on-chain order book.”
Hou added:
“It can be seen that the on-chain trading paradigm has been converging with the traditional secondary market trading mode, from simple to complex, from off-chain to on-chain. Behind the transformation of the transaction mode is the evolving public chain performance, such as the maturity of Layer2 and the explosion of new public chains. Nonetheless, on-chain perpetual contracts are still in the early stages of development, which means there are many opportunities waiting to be discovered.”
To access the full report, check here.
As covered, Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was “established in April 2016.”
Since March 2018, it has been committed “to comprehensively expanding the research and exploration of various fields of blockchain.”
As the research object, the research goal is “to accelerate the research and development of blockchain technology, promote the application of blockchain industry, and promote the ecological optimization of the blockchain industry.”
The main research content “includes industry trends, technology paths, application innovations in the blockchain field, Model exploration, etc.”
Based on the principles of public welfare, rigor and innovation, Huobi Research Institute “will carry out extensive and in-depth cooperation with governments, enterprises, universities and other institutions through various forms to build a research platform covering the complete industrial chain of the blockchain.”
Industry professionals provide “a solid theoretical basis and trend judgments to promote the healthy and sustainable development of the entire blockchain industry.”