It's striking how much the crypto world depends on trust in other parties. The whole point of crypto was supposed to be that it was "trustless". But it's not set up that way. All these crypto derivatives are not set up as contracts on a blockchain, with assets locked up until the derivatives settle. They're book entries with some weakly regulated exchange in Outer Nowhere.
The people who want trustless decentralization and the people who want leveraged gambling and the people who want KYC-free international money transfer may be different people. The only problem with Liberty Reserve was that it got shut down; if a "decentralied" fig leaf can allow it to operate... let there be "decentralization".
There are other exchanges that are much more centralised, like Hyperliquid, and it is incorrect to call these decentralised. But there are truly decentralised alternatives as well.
GMX is not as popular, let's say Binance, because onchain user experience has been very hard. You don't want to sign every order from your crypto wallet. Transaction cost ("gas fee") used to be too high for trading. This is finally changing with the latest Ethereum improvement proposals, dealing with so called account abstraction.
[1] Because futures always settle on an external price, the price feed must come from some oracle. In the case of GMX, there are keepers (multiple of them) who are responsible to bring the correct price to Arbitrum chain and trigger the settlement. But it's not a single party.
There is a common confusion in this (perhaps?). Most businesses get created primarily to make money. Not primarily to solve the world's problems. It's easy to say "if they really had their customers at heart...". Well, yeah, but that's not and has never been the priority. It's not a cynical view, it's being realistic.
All kinds of mayhem follows. All the way to fundamental research papers such as "on average actively managed mutual funds do not beat XX index". Well, yeah, mutual funds don't get created because someone is good at it. They get created because someone wants to make money. Beating XX is not the first objective, or competence, of the entrepreneurs. Hopefully that fund doesn't last too long but often it does, and anyway there are many of them.
So anyway, there are plenty of ways to try and leverage ideas of cryptography, crytocurrencies, block chain - most of which are still accessible - and most of the ventures in the field are not going to be primarily about solving the users' problems.
Different cryptocurrency products offer different properties and guarantees. Much like different databases offer different concurrency models. Folks that use currency backed stablecoins do not care for the trustless properties. There are various algorithmic stablecoins out there that you can use to stay free of KYC/AML but they aren't very popular.
Largely the folks that want trustless currency use chains like BTC, BCH, XMR, or ZEC.
This is a common place in any thread about cryptocurrencies on HN unfortunately... I could be convinced of my own message also being a sweeping generalization if anyone can point out a single post where top comments aren't doing exactly this when it comes to this topic, even the technical ones.
This is a useless comment for most readers (myself included!) unless you specify what you think those sweeping generalizations are, and why you think they're unsound.
By now crypto-in-practice has violated so many of its supposed founding principles that it's tired and cliche to point it out.
It was supposed to be limited in supply unlike fiat, and yet Tether underpins the whole thing and they print that out of thin air all the time. It was supposed to be decentralized, but in practice a few big exchanges control all the transactions and a few big mining pools control all the minting. It was supposed to be "code is law", and yet if you find a big exploit on smart contracts it'll be unwound later on and the cops will still show up for you. And as you say, it was supposed to be trustless, but counterparty risk is everywhere.
And it turns out nobody cares, because to a first approximation nobody is in crypto for the libertarian principles. It is all about number go up; always has been, always will be. It's not even worth pointing out anymore.
> It was supposed to be limited in supply unlike fiat, and yet Tether underpins the whole thing and they print that out of thin air all the time.
This is a joke right? Tether (USDT) is pegged to the dollar... and there is not really a limit to the USD printing machine, nobody ever claimed a stablecoin would have a limited supply. It's literally the main critique of the fiat system levied by crypto proponents.
The only asset which has made and still hold promises of not increasing its supply over its limit set through its consensus code is Bitcoin. And it is nowhere close to ever change... as a matter of fact if it changed, most people wouldn't call that fork Bitcoin.
Yes. Cryptocurrencies operate within the larger econo-political system we live in, and as long as cryptocurrencies replace only a part of that system, the rest of the system will continue to operate as it does otherwise. Its quite clear that the way capitalism operates in practice is that most markets end up being oligopolish, and that people with guns are needed to keep the system stable. So not at all surprising.
> And it turns out nobody cares, because to a first approximation nobody is in crypto for the libertarian principles. It is all about number go up; always has been, always will be. It's not even worth pointing out anymore.
I agree 100% - Meme stocks go brrrrrrrr
The idea that it's a currency that lives beyond the reach of governments is laughable (as soon as something goes bang a lot of the owners call for... regulators and government oversight)
Hyperliquid being on chain in the traditional sense is fiction. You have a closed source piece of software run by closely controlled "validators" with additionally centralised components.
whats more important to me is that you don't have to ask anybody if you can deploy an entire financial services suite
and not only will other people worldwide use it immediately, they will also pay for all your infrastructure costs as they update the chain state with every transaction fee that they pay
the permissionless nature means you can deploy anything as cenralized or decentralized as you want, and its up to consumers to be discerning and its only their fault if they are not
cost wise this will always be attractive to developers and for them to bring over every audience they can muster, because web 2.0 cloud cannot compete with that cost structure and permissionless nature
I spent a few years leading dev on decentralized exchanges, building bridges to other chains and building a sophisticated margin system on top of the trading pools.
A few things I think I've learned:
In its current state, most retail investors are simply supplying to the sophisticated investor.
Although some DeFi projects make a genuine effort to provide analysis tools to level the playing field, it's not nearly enough.
The safest least volatile yields in DeFi are lending your stable coins into a system such as aave. The yield is not far from a high yield USD savings account.
Exchanges such as Uniswap may be the most important legit tool in DeFi. The biggest problem is the liquidity provider's ability to protect their downside...so the investor adds on more sophisticated monitoring/hedging schemes. This gets us back to the retail investor being at a severe disadvantage.
Yes if you start doing analysis on DeFi and a lot of cryptocurrency markets, you can see very quickly that retail investors ("dumb money") are just providing liquidity to the smart money. There's a lot of unsophisticated money in these markets which makes it pretty fun to compete as someone trying to be smart.
It's even more brutal in the more established, traditional markets though. Obviously if you're going long and managing a portfolio that's a different perspective, but it's very hard as an outsider to compete with the smart funds in the world. You might be smart but most of those funds are very smart, well capitalized, and have a very deep understanding of market structure.
Why would I want a perp on BTC when I can just buy the coin? The example quoted the price of the perp as (close to) the same as the price of BTC, so if I'm not getting leverage why not just buy the coin and avoid counterparty risk?
If the goal is just to buy and hold, then you wouldn't use perps, not only because of counterparty risk but also because the funding rate is typically positive, meaning you pay (usually ~10% APR) to be long.
The point of perps is:
- Easy access to leverage. Unlike options or futures, there's no need to roll over.
- It's the easiest way to short a coin. Most of the time you even get paid the funding rate to be short.
- Trading fees are typically much lower than for spot.
- Volume and liquidity can be better for perps than for spot. The BTC/USDT perp did 10x the volume of the spot pair in the last 24h on Binance.
Because the exchanges offer 20x leverage on perps but not on spot. In theory perps can have deeper liquidity because they can go beyond the 21M BTC limit. If you don't care about those factors then you shouldn't trade perps; they aren't intended to be magically superior to spot.
You want to buy bitcoin to be a bitcoin investor. But if you want to actively trade, both buy and sell, futures offer much more capital efficient solution. With leverage, you can make larger trades with less money.
A perp is a future which is different from buying BTC at its spot price. If you remove the "perpetual" aspect of the future and it was a regular future that was settling soon, likewise it would be similar in price but not the same as the underlying. There's lots of uses for futures and they're often used as hedges against various forms of risk, like currency risk.
>The basis trade, classically executed, is delta neutral: one isn’t exposed to the underlying itself. You don’t need any belief in Bitcoin’s future adoption story, fundamentals, market sentiment, halvings, none of that. You’re getting paid to provide the gambling environment, including a really important feature: the perp price needs to stay reasonably close to the spot price, close enough to continue attracting people who want to gamble. You are also renting access to your capital for leverage.
Patrick is largely correct on perp futures being mostly used as a leverage instrument to gamble on bitcoin or ether by retail. However I think he's missing one point which is that actually some institutional players also use CME futures to gain exposure to Bitcoin (e.g., BITO ETF or a pension fund that wants to gain exposure to crypto and have a fiduciary duty to hold assets with AAA custodians).
The thesis being that if you're an institution, you don't trust the relatively "fly-by" offshore crypto or even US-regulated custodians of crypto. When you trade CME bitcoin futures, your settlement is guaranteed by the clearing entities of Chicago Mercantile Exchange which are bulge bracket firms of TradFi. So why CME futures largely reflect a premium over the spot BTC price - and this premium is a function of the demand of bitcoin at anytime and the Fed fund rate. As the bitcoin futures market is highly efficient, the CME futures premium is arbitraged across the various DeFi and CeFi exchanges with basis points added relative to the default risk of each venue.
And the basis trade itself is not a "risk-free" arbitrage. The seller on the other side of gamblers are exposed to "right-tail" risk - your premium you get paid to "carry" the bitcoin is fixed while the collateral you must hold in theory to "hold" the coin on behalf of the buyer could be in theory infinite if bitcoin skyrockets to infinity. Sell too much and you might not have enough collateral before the futures settlement happens (for a fixed term futures, not perps) kind of like a reverse but still deadly scenario with Silicon Valley Bank (i.e., you incur "paper loss" that goes away if you can hold it to expiry; but you get force liquidated before then).
If the price of Bitcoin increases, you collateral value increases along the losses from the short. This is why it's "delta neutral".
The real risk is to be auto-deleveraged when the other side blows up and no one is here to buy its long. Then the perp exchange closes your short and you have a naked long.
> When you trade CME bitcoin futures, your settlement is guaranteed by the clearing entities of Chicago Mercantile Exchange which are bulge bracket firms of TradFi.
The CME clearinghouse itself is the guarantor. And below it are the clearing firms. The trading firms don't guarantee trades, the clearing firms do.
In fact, for many products, the CME is the counterparty for both sides of a trade.
It appears to me that majority of the article is about (unregulated) leveraged trading, with perps being an instrument to get leverage. I seen similar stories of blowing up outside us in forex market, for example, where no one were talking about futures, it was just 100x leverage that was biting many (most?) traders.
>In cases where management deems paying winners from the insurance fund would be too costly and/or impossible, they automatically deleverage some winners.
Readit News
https://gmx.io/
Some more modern decentralised exchanges (DEXes) dealing with leveraged trades and try to minimise centralisation also include YieldBases:
https://yieldbasis.com/markets
There are other exchanges that are much more centralised, like Hyperliquid, and it is incorrect to call these decentralised. But there are truly decentralised alternatives as well.
GMX is not as popular, let's say Binance, because onchain user experience has been very hard. You don't want to sign every order from your crypto wallet. Transaction cost ("gas fee") used to be too high for trading. This is finally changing with the latest Ethereum improvement proposals, dealing with so called account abstraction.
[1] Because futures always settle on an external price, the price feed must come from some oracle. In the case of GMX, there are keepers (multiple of them) who are responsible to bring the correct price to Arbitrum chain and trigger the settlement. But it's not a single party.
There is a common confusion in this (perhaps?). Most businesses get created primarily to make money. Not primarily to solve the world's problems. It's easy to say "if they really had their customers at heart...". Well, yeah, but that's not and has never been the priority. It's not a cynical view, it's being realistic.
All kinds of mayhem follows. All the way to fundamental research papers such as "on average actively managed mutual funds do not beat XX index". Well, yeah, mutual funds don't get created because someone is good at it. They get created because someone wants to make money. Beating XX is not the first objective, or competence, of the entrepreneurs. Hopefully that fund doesn't last too long but often it does, and anyway there are many of them.
So anyway, there are plenty of ways to try and leverage ideas of cryptography, crytocurrencies, block chain - most of which are still accessible - and most of the ventures in the field are not going to be primarily about solving the users' problems.
The few actual decentralized exchanges are too slow and expensive.
Largely the folks that want trustless currency use chains like BTC, BCH, XMR, or ZEC.
It was supposed to be limited in supply unlike fiat, and yet Tether underpins the whole thing and they print that out of thin air all the time. It was supposed to be decentralized, but in practice a few big exchanges control all the transactions and a few big mining pools control all the minting. It was supposed to be "code is law", and yet if you find a big exploit on smart contracts it'll be unwound later on and the cops will still show up for you. And as you say, it was supposed to be trustless, but counterparty risk is everywhere.
And it turns out nobody cares, because to a first approximation nobody is in crypto for the libertarian principles. It is all about number go up; always has been, always will be. It's not even worth pointing out anymore.
This is a joke right? Tether (USDT) is pegged to the dollar... and there is not really a limit to the USD printing machine, nobody ever claimed a stablecoin would have a limited supply. It's literally the main critique of the fiat system levied by crypto proponents.
The only asset which has made and still hold promises of not increasing its supply over its limit set through its consensus code is Bitcoin. And it is nowhere close to ever change... as a matter of fact if it changed, most people wouldn't call that fork Bitcoin.
I agree 100% - Meme stocks go brrrrrrrr
The idea that it's a currency that lives beyond the reach of governments is laughable (as soon as something goes bang a lot of the owners call for... regulators and government oversight)
and not only will other people worldwide use it immediately, they will also pay for all your infrastructure costs as they update the chain state with every transaction fee that they pay
the permissionless nature means you can deploy anything as cenralized or decentralized as you want, and its up to consumers to be discerning and its only their fault if they are not
cost wise this will always be attractive to developers and for them to bring over every audience they can muster, because web 2.0 cloud cannot compete with that cost structure and permissionless nature
Deleted Comment
A few things I think I've learned:
In its current state, most retail investors are simply supplying to the sophisticated investor.
Although some DeFi projects make a genuine effort to provide analysis tools to level the playing field, it's not nearly enough.
The safest least volatile yields in DeFi are lending your stable coins into a system such as aave. The yield is not far from a high yield USD savings account.
Exchanges such as Uniswap may be the most important legit tool in DeFi. The biggest problem is the liquidity provider's ability to protect their downside...so the investor adds on more sophisticated monitoring/hedging schemes. This gets us back to the retail investor being at a severe disadvantage.
It's even more brutal in the more established, traditional markets though. Obviously if you're going long and managing a portfolio that's a different perspective, but it's very hard as an outsider to compete with the smart funds in the world. You might be smart but most of those funds are very smart, well capitalized, and have a very deep understanding of market structure.
The point of perps is:
- Easy access to leverage. Unlike options or futures, there's no need to roll over.
- It's the easiest way to short a coin. Most of the time you even get paid the funding rate to be short.
- Trading fees are typically much lower than for spot.
- Volume and liquidity can be better for perps than for spot. The BTC/USDT perp did 10x the volume of the spot pair in the last 24h on Binance.
Another reason is that the future may be trading slightly below the spot price of BTC due to lots of traders shorting.
Other than that, futures tend to be more liquid and capital efficient.
Dead Comment
Patrick is largely correct on perp futures being mostly used as a leverage instrument to gamble on bitcoin or ether by retail. However I think he's missing one point which is that actually some institutional players also use CME futures to gain exposure to Bitcoin (e.g., BITO ETF or a pension fund that wants to gain exposure to crypto and have a fiduciary duty to hold assets with AAA custodians).
The thesis being that if you're an institution, you don't trust the relatively "fly-by" offshore crypto or even US-regulated custodians of crypto. When you trade CME bitcoin futures, your settlement is guaranteed by the clearing entities of Chicago Mercantile Exchange which are bulge bracket firms of TradFi. So why CME futures largely reflect a premium over the spot BTC price - and this premium is a function of the demand of bitcoin at anytime and the Fed fund rate. As the bitcoin futures market is highly efficient, the CME futures premium is arbitraged across the various DeFi and CeFi exchanges with basis points added relative to the default risk of each venue.
And the basis trade itself is not a "risk-free" arbitrage. The seller on the other side of gamblers are exposed to "right-tail" risk - your premium you get paid to "carry" the bitcoin is fixed while the collateral you must hold in theory to "hold" the coin on behalf of the buyer could be in theory infinite if bitcoin skyrockets to infinity. Sell too much and you might not have enough collateral before the futures settlement happens (for a fixed term futures, not perps) kind of like a reverse but still deadly scenario with Silicon Valley Bank (i.e., you incur "paper loss" that goes away if you can hold it to expiry; but you get force liquidated before then).
The real risk is to be auto-deleveraged when the other side blows up and no one is here to buy its long. Then the perp exchange closes your short and you have a naked long.
The CME clearinghouse itself is the guarantor. And below it are the clearing firms. The trading firms don't guarantee trades, the clearing firms do.
In fact, for many products, the CME is the counterparty for both sides of a trade.
that's deep, in all senses.
If you want to get into the deepest detail there are several decentralised perpetual futures exchanges.
Here are some open source codebases on Github:
https://github.com/vegaprotocol/vega
https://github.com/dydxprotocol/v4-chain/
https://github.com/gmx-io/gmx-synthetics
https://github.com/0xOstium/smart-contracts-public/
Vega is a stalled project, but they have good documentation:
https://docs.vega.xyz/release/concepts/new-to-vega
you can go through the drift labs code to see implementation of perps