Written by: Web3 Farmer Frank
What on-chain derivative protocols have you used recently?
This roughly illustrates the awkward footnote of the DeFi derivative track. To be factually accurate, if it weren't for the giant whale James Wynn serving as the 'best on-chain spokesperson' for Hyperliquid, the once 'holy grail' status of dYdX and GMX over the past two years has long since faded, and their rapid decline has nearly ended the narrative of on-chain derivatives.
The reason is that they have long been trapped in the identity of 'CEX imitators': they copied the contract logic and leverage mechanisms of centralized platforms but bore a higher risk exposure and lower user experience, with significant gaps compared to CEX in key dimensions such as liquidation mechanisms, matching efficiency, and trading depth. Until Hyperliquid emerged, relying on on-chain characteristics to reconstruct product forms and user value, it preserved the possibility for further evolution in this track.
In May, Hyperliquid's perpetual contract trading volume reached 248.295 billion dollars, setting a record for the highest monthly volume, equivalent to 42% of Coinbase's spot trading volume during the same period, and the protocol's revenue also reached 70.45 million dollars, refreshing records simultaneously.
However, from a longer-term perspective, the Hyperliquid structure still follows the typical contract trading model; it has only taken the first step from optimizing the 'existing solutions' to exploring the 'native solutions.' This article also aims to delve into deeper issues from the predicament of on-chain derivatives and the developmental context of Hyperliquid:
The next step for on-chain derivatives is whether to continue optimizing the logic template of centralization or to move towards a more differentiated product innovation path based on the chain's openness and long-tail asset characteristics.
The 'new ticket' for decentralized derivatives
From a data standpoint, regardless of how market conditions fluctuate, cryptocurrency derivatives remain an ever-expanding super cake — only the knife and fork for cutting the cake are still firmly held in the hands of CEX.
Since 2020, centralized exchanges (CEX) have gradually restructured the market pattern that was originally dominated by spot trading, using contract futures as the entry point. Combining the latest data from Coinglass, we find that in the past 24 hours, the trading volume of the top five CEX contract futures has reached levels of over ten billion dollars, with Binance, in particular, exceeding 60 billion dollars.
Widening the perspective allows us to intuitively perceive the penetration strength of derivative trading. For instance, TokenInsight's statistics show that currently, Binance's daily trading volume of derivatives accounts for 78.16% of the total daily trading volume of spot and derivatives combined (500 billion dollars), and this ratio continues to rise. In simple terms, the daily trading volume of current CEX derivatives is almost four times that of spot trading.
However, on-chain, despite DEX spot trading volumes remaining in the tens of billions, decentralized derivatives have not managed to break through the market gap: dYdX has an average daily trading volume of about 19 million dollars, while the once-prominent GMX has seen both its positions and 24-hour trading volume fall below 10 million dollars, nearly forgotten by the market.
The only surprise is that Hyperliquid, recently viewed as a 'victory of gradual decentralization' — breaking the deadlock as the 'new king' of on-chain derivative protocols, had a daily trading volume that once exceeded 18 billion dollars, capturing over 60% market share of the on-chain perpetual contract market.
Its revenue scale surpasses most second-tier CEX, maintaining a growth rate of over 50% month-on-month for three consecutive months. If we carefully observe the rise of Hyperliquid, we will find that the key is precisely in its reconstruction of value logic through a vertically integrated architecture.
Integrating order book engines with smart contract platforms deeply allows on-chain derivatives to first compete directly with CEX in terms of trading speed and cost, establishing structural advantages in cost, auditability, and composability (I think this is somewhat similar to the structural advantages BYD holds in the new energy market).
This also proves that on-chain derivatives are not lacking in demand, but rather lack product forms that truly adapt to DeFi characteristics. In simpler terms, traditional perpetual contracts depend on margin mechanisms, and high leverage leads to frequent liquidations, making it difficult for users to control risk. Previous on-chain derivatives have yet to create value that CEX cannot replace.
Once users discover that trading on dYdX/GMX carries the same liquidation risk but cannot achieve Binance-level liquidity depth and trading experience, their willingness to migrate will naturally drop to zero.
Because of this, decentralized derivatives inevitably lost their charm in the last narrative cycle. Their decline fundamentally stems from the deep contradiction between the decentralized framework and the demand for financial products — there is a decentralized narrative, but no product ticket that users 'must use.' This is also the core factor that enabled Hyperliquid to overtake in a curve.
So on the surface, the crushing advantage of CEX comes from its user base and liquidity depth, but a deeper contradiction lies in the fact that on-chain derivatives have not been able to solve a core proposition: how to balance risk, efficiency, and user experience within a decentralized framework? Especially as the industry enters the deep waters of derivative innovation, how can we minimize the entry barrier for new users and maximize asset efficiency?
In fact, the 'event contract' recently launched by Binance provides a new reference point — essentially a variant of options products, confirming the market's strong demand for simple and easy-to-use 'non-linear returns.'
From my personal perspective, if we want to escape the competitive red sea of perpetual contracts, options may be a more fitting antidote for the general user — their 'non-linear returns' characteristic (limited loss for buyers, unlimited potential gains) naturally aligns with the high volatility of cryptocurrencies, and the 'small upfront premium' mechanism can significantly meet the simple trading needs of the general public.
From contracts to options, is the promised land of on-chain derivatives?
Objectively speaking, in the field of on-chain derivatives, options with 'non-linear returns' characteristics are actually the most suitable product form: not only do they naturally avoid liquidation risks, but they also achieve a better risk-return ratio than futures contracts through 'time value leverage.'
However, due to the complexity of options involving exercise dates, strike prices, and other components, they are not as intuitive for retail investors as perpetual contracts. In particular, the complex exercise rules of traditional options (such as expiration dates and spread combinations) have a structural contradiction with retail investors' pursuit of simplicity and immediate trading, and this mismatch is especially evident in on-chain scenarios.
Therefore, for decentralized options products, the challenge lies in how to build an on-chain options system that balances 'crypto capital efficiency' with 'product friendliness.' This is worth discussing in the context of the 'coin-based perpetual options' mechanism proposed by Fufuture — which attempts to reshape the underlying logic of on-chain derivatives through 'decomplexification' and 'capital efficiency revolution.'
If we break down the structure of 'coin-based perpetual options,' the key points are actually in its literal meaning: 'coin-based' and 'perpetual options.'
Only a coin-based approach can maximize the capital efficiency of 'long-tail assets.'
The core starting point of 'coin-based' is to maximize the release of users' capital efficiency of on-chain crypto assets. After all, in the context of the meme coin wave and the explosion of multi-chain ecosystems, most users' on-chain assets are highly fragmented, scattered across different chains and long-tail token assets.
However, existing protocols often require settlement in stablecoins, which forces users holding long-tail assets like BTC, ETH, or meme coins to either be unable to participate directly in trading or passively bear exchange losses (currently, mainstream CEXs also use USDT/USDC as the settlement currency and have minimum trading limits), fundamentally contradicting the DeFi idea of 'asset sovereignty and freedom.'
Taking Fufuture, a decentralized coin-based options protocol currently exploring similar products, as an example, it allows users to directly use any on-chain token as collateral to participate in BTC/ETH index options trading, thereby aiming to eliminate the need for exchange steps and activating the derivative value of dormant assets — for instance, users holding meme coins can hedge against market volatility risks without liquidating.
From the data perspective, as of May 2025, among the margin trading supported by Fufuture, the total margin positions of meme coins like Shiba Inu (SHIB) and PEPE account for a high proportion of active positions on the platform, proving that there is indeed a strong demand for users to participate in hedging and speculation using non-stablecoin assets, which indirectly verifies that 'coin-based' margins are indeed a significant market pain point.
The extreme leverage thinking of 'expiration date options' perpetualization
From another dimension, in recent years, there has been a growing preference for expiration date options as high odds short-term trading — since 2016, small trading users have been flocking to options, with 0 DTE options trading's share of total SPX options volume rising from 5% to 43%.
Source: moomoo.com
The 'perpetualization' of expiration date options actually provides users with the opportunity to continuously bet on high odds 'expiration date options.'
After all, the setting of traditional options' 'exercise date' is severely mismatched with most users' short-term trading habits, while the frequent opening of 'expiration date options' can be overwhelming. Taking Fufuture's introduction of a perpetual mechanism in options products as an example — it cancels the fixed expiration date and instead adjusts the holding cost through dynamic funding rates.
This means that users can hold bearish/bullish options positions indefinitely, only needing to pay a minimal daily funding cost (far below the financing rates of CEX perpetual contracts), essentially allowing users to extend their holding periods indefinitely and converting the high odds feature of 'expiration date options' into a sustainable strategy while avoiding passive losses due to time decay (Theta).
For example, when users open a 24-hour BTC put option using USDT or other long-tail assets as collateral, if the BTC price continues to fall, they can hold their position long-term to capture greater returns. If their judgment is incorrect, the maximum loss is limited to the initial margin, with no need to worry about liquidation risks — and at the end of the 24-hour period, they can freely choose whether to continue extending the position.
This combination of 'limited loss + unlimited gain + time freedom' essentially transforms options into a 'low-risk version of perpetual contracts,' significantly lowering the participation threshold for retail investors.
Overall, the deep value of the 'coin-based perpetual options' paradigm shift lies in that when users realize that any long-tail token in their wallets, even meme coins, can directly transform into a risk hedging tool, and when the time dimension is no longer the enemy of returns, on-chain derivatives may truly break through niche markets and build an ecological niche that can stand toe-to-toe with CEX.
From this perspective, the potential of 'coin-based perpetual options' to showcase a 'new ticket' may be one of the important weights in tilting the balance of the game between on-chain and CEX.
Will on-chain options yield new solutions worth paying attention to?
Nevertheless, the widespread adoption of options, especially on-chain options, is still in its very early stages.
Visibly, since the second half of 2023, new players in on-chain derivatives have been exploring entirely new business directions: whether it is Hyperliquid's on-chain native leverage or Fufuture's 'coin-based perpetual options,' decentralized derivative trading products are indeed nurturing some seeds of significant change.
For these new-generation protocols, aside from achieving a direct confrontation with CEX in terms of trading speed and cost, and unlocking the capital efficiency of long-tail crypto assets, including meme coins, the key lies in maximizing the binding of interests among the community, trading users, and the protocol based on on-chain architecture — liquidity providers, trading users, and the protocol itself can form a network of 'shared profits and losses' (taking Fufuture's protocol architecture as an example):
Liquidity providers gain risk-layered returns through a dual-pool mechanism (high return in private pool + low risk in public pool);
Traders can participate in high-leverage strategies with any asset, and the loss limit is clear;
The protocol itself captures ecological value growth through governance tokens;
This fundamentally subverts the traditional 'platform-user' exploitation relationship of CEX. When the long-tail tokens held in users' wallets can directly become trading tools without relying on CEX, and when trading fees and ecological value are distributed to ecosystem contributors through DAOs, on-chain derivatives finally reveal the true form of DeFi — not just a trading venue, but a value redistribution network.
This is actually the 'DeepSeek moment' for on-chain derivatives that the market has been longing for over the years — allowing decentralized derivatives to break through the constraints of trading experience, gradually introducing on-chain native leverage and maximizing capital efficiency without relying on CEX as a necessary element, thus potentially bringing the market to a larger scale leap, fostering more boundary-less innovations, and welcoming a new 'DeFi summer.'
Historical experience tells us that each narrative explosion requires a resonance of 'correct narrative + correct timing.' Whoever can solve the user's most painful problem of asset efficiency at the right moment will grasp the scepter of on-chain derivatives.
Written at the end
I personally believe that decentralized derivative protocols are undoubtedly the 'on-chain holy grail,' and not a pseudo-proposition of narrative.
From multiple dimensions, decentralized derivatives still have the potential to become one of the most scalable and income-generating tracks within the DeFi ecosystem. However, it must truly step out of the shadow of 'centralized alternatives' and leverage on-chain native structures and the revolution of capital efficiency to achieve self-reform in product forms.
However, the crux of the issue is that for on-chain users, the value of decentralized derivatives lies not only in providing new trading tools but also in whether it can unlock a path of 'frictionless asset flow - derivative hedging - compound growth of returns.'
From this angle, when holders of meme coins can directly use tokens to participate in trading long-tail crypto assets, and when multi-chain assets do not need to cross chains to become collateral, the form of on-chain derivatives can be considered redefined. This is also the leap thinking of new players like Hyperliquid and Fufuture.
Perhaps the ultimate goal of decentralized derivatives is not to replicate CEX but to create new demand using the native advantages of the chain (open, composable, permissionless), and the market may have already taken a key step.
