On-chain derivatives bloodbath: dYdX/GMX decline, Hyperliquid dominates, who will get the next ticket?

Author: Web3 Farmer Frank

What on-chain derivatives protocols have you used recently?

This is almost an awkward footnote for the DeFi derivatives track. To be honest, without Hyperliquid, which has been dubbed the "best on-chain spokesperson" by whale James Wynn, the once "holy grail" status of dYdX and GMX has long faded over the past two years, and their rapid decline has nearly ended the narrative of on-chain derivatives.

The reason is simple: they have long been trapped in the identity of "CEX imitators": replicating the contract logic and leverage mechanisms of centralized platforms, while bearing higher risk exposure and lower user experience. There are still significant gaps in key dimensions such as liquidation mechanisms, matching efficiency, and trading depth compared to CEX, until the emergence of Hyperliquid, which relies on on-chain characteristics to reconstruct product forms and user value, thus preserving the possibility for further evolution in this track:

In May alone, Hyperliquid's perpetual contract trading volume reached $24.8295 billion, setting a record for the highest monthly volume in history, equivalent to 42% of Coinbase's spot trading volume during the same period, with protocol revenue also hitting $70.45 million, simultaneously breaking records.

However, from a longer-term perspective, Hyperliquid still adopts a typical contract trading model; it has merely taken the first step from optimizing "existing solutions" to exploring "native solutions." This article aims to delve into deeper issues from the predicament of on-chain derivatives and the development trajectory of Hyperliquid:

Is the next step for on-chain derivatives to continue optimizing centralized logic templates, or to leverage the openness of the chain and the characteristics of long-tail assets to pursue a more differentiated path of product innovation?

The "New Ticket" for Decentralized Derivatives

From a data perspective, regardless of how the market fluctuates, cryptocurrency derivatives have always been a super-sized cake with a continuously expanding volume—it's just that the knife and fork for slicing the cake are still firmly held in the hands of CEX.

Since 2020, CEX has gradually restructured the market landscape, originally dominated by spot trading, using contract futures as an entry point. According to the latest data from Coinglass, in the past 24 hours, the trading volume of the top five CEX contract futures has reached the level of tens of billions of dollars, with Binance surpassing $60 billion.

If we broaden our perspective, we can intuitively perceive the penetration of derivatives trading. For example, TokenInsight's statistics show that currently, Binance's derivatives account for 78.16% of the total daily trading volume (which is $500 billion) of spot and derivatives combined, and this ratio continues to rise. In simple terms, the daily trading volume of CEX derivatives is almost four times that of spot trading.

However, on-chain, although DEX spot trading volume remains in the tens of billions of dollars, decentralized derivatives have never managed to break into the market gap: dYdX has an average daily trading volume of about $19 million, and the once-prominent GMX has seen both its open interest and 24-hour trading volume drop below $10 million, nearly forgotten by the market.

The only surprising development is the recent emergence of Hyperliquid, seen as a "victory for progressive decentralization"—breaking the deadlock with the posture of the "new king" of on-chain derivatives, with daily trading volume at one point exceeding $18 billion, capturing over 60% of the on-chain perpetual contract market share.

Its revenue scale surpasses that of most second-tier CEXs, maintaining a month-on-month growth rate of over 50% for three consecutive months. If we closely observe the rise of Hyperliquid, we will find that its key to success lies in its reconstruction of value logic through a vertically integrated architecture:

By deeply integrating the order book engine with the smart contract platform, on-chain derivatives can finally compete head-to-head with CEX in terms of trading speed and cost, establishing structural advantages in dimensions such as cost, auditability, and composability (I personally think it is somewhat similar to the structural advantages that BYD has in the new energy market).

This also proves that on-chain derivatives are not lacking in demand, but rather in truly DeFi-compatible product forms. In simple terms, traditional perpetual contracts rely on margin mechanisms, and high leverage leads to frequent liquidations, making it difficult for users to control risk. Previous on-chain derivatives have failed to create value that CEX cannot replace.

Once users realize that trading on dYdX/GMX involves the same liquidation risks but does not offer Binance-level liquidity depth and trading experience, their willingness to migrate naturally drops to zero.

For this reason, decentralized derivatives inevitably lost their allure in the last narrative, and their decline is essentially a deep-seated contradiction between the decentralized framework and the demand for financial products—there is a narrative of decentralization, but no product ticket that users "must use." This is also a core factor that has allowed Hyperliquid to overtake the competition.

So, on the surface, the crushing advantage of CEX comes from its user base and liquidity depth, but the deeper contradiction lies in the fact that on-chain derivatives have never been able to solve a core question: how to balance risk, efficiency, and user experience within a decentralized framework? Especially as the industry enters the deep waters of derivatives innovation, how to minimize the entry barriers for new users and maximize asset efficiency?

In fact, the "event contracts" recently launched by Binance provide a new reference point—essentially a variant of options products, confirming the market's strong demand for simple, 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 remedy for the characteristics of on-chain—its "non-linear return" feature (limited losses for buyers, unlimited potential gains) naturally aligns with the high volatility of cryptocurrencies, while the "small upfront premium" mechanism can significantly cater to the simple trading needs of the general public.

From Contracts to Options: The Promised Land of On-Chain Derivatives?

Objectively speaking, in the field of on-chain derivatives, options with "non-linear returns" are actually the most suitable product form: not only do they naturally avoid liquidation risks, but they also achieve a better risk-reward ratio than futures contracts through "time value leverage."

However, due to the complex components of options, such as expiration dates and strike prices, they are not as intuitive for retail investors as perpetual contracts, especially since the complex exercise rules of traditional options (such as expiration dates and spread combinations) always present a structural contradiction with the retail investors' pursuit of simple, instant trading, and this mismatch is particularly 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" and "product friendliness." This is where Fufuture's proposed "crypto-backed perpetual options" mechanism is worth discussing—attempting to reshape the underlying logic of on-chain derivatives through "decomplexification" and "asset efficiency revolution."

If we break down the structure of "crypto-backed perpetual options," the key points are indeed in its literal meaning: "crypto-backed" and "perpetual options."

Crypto-Backed to Maximize the Capital Efficiency of "Long-Tail Assets"

The core starting point of "crypto-backed" is to maximize the capital efficiency of users' 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 exhibit a high degree of fragmentation, such as being 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 even meme coins to either be unable to participate in trading directly or to passively bear exchange losses (currently, mainstream CEXs also use USDT/USDC as settlement currencies, and all have minimum trading limits), which fundamentally contradicts the DeFi principle of "asset sovereignty freedom."

Take Fufuture, a decentralized crypto-backed 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, aiming to eliminate the exchange step and activate the derivative value of dormant assets—for instance, users holding meme coins can hedge market volatility risk without liquidating their assets, or even amplify returns through high leverage.

From the data perspective, as of May 2025, the margin trading supported by Fufuture shows that the total margin positions of meme coins like Shiba Inu (SHIB) and PEPE account for a high proportion of the platform's active positions, proving that there is indeed a strong demand for using non-stablecoin assets for options hedging and speculation, which also indirectly validates that "crypto-backed" margin is indeed a significant market pain point.

The Ultimate Leverage Idea of "Expiration Options" Perpetualization

From another dimension, in recent years, there has been an increasing preference for high-odds short-term trading of expiration options—since 2016, small trading users have started flocking to options, with the proportion of 0 DTE options trading in the total SPX options volume rising from 5% to 43%.

Source: moomoo.com

The "perpetualization" of expiration options actually provides users with the opportunity to continuously bet on high-odds "expiration options."

After all, the "expiration date" setting of traditional options is severely mismatched with the short-term trading habits of most users, and the frequent opening of expiration options can be overwhelming. Taking Fufuture's introduction of a perpetual mechanism in options products as an example—it eliminates fixed expiration dates and instead adjusts holding costs through dynamic funding rates.

This means that users can hold bearish/bullish options positions indefinitely, only needing to pay a minimal funding fee daily (far lower than the financing rates of CEX perpetual contracts), which allows users to extend their holding periods indefinitely, transforming the high-odds characteristics of "expiration options" into a sustainable strategy while avoiding passive losses due to time decay (Theta).

An example may illustrate this more intuitively: when a user opens a 24-hour BTC put option using USDT or another long-tail asset as collateral, if the BTC price continues to fall, their position can be held long-term to capture greater returns; if the judgment is incorrect, the maximum loss is limited to the initial margin, with no need to worry about liquidation risk—meanwhile, at the 24-hour expiration, they can freely choose whether to continue the position.

This combination of "limited losses + unlimited gains + time freedom" essentially transforms options into a "low-risk version of perpetual contracts," significantly lowering the participation threshold for retail investors.

Overall, the deeper value of the paradigm shift to "crypto-backed perpetual options" lies in the fact that when users discover that any long-tail token in their wallets, even meme coins, can be directly transformed into risk hedging tools, and when the time dimension is no longer the enemy of returns, on-chain derivatives may truly break through the niche market and establish an ecological position that can stand shoulder to shoulder with CEX.

From this perspective, the potential of the "new ticket" presented by "crypto-backed perpetual options" may be one of the important weights that could tilt the balance of the game between on-chain and CEX.

Will On-Chain Options Yield New Insights Worth Noting?

However, the large-scale popularization and penetration of options, especially on-chain options, are still in the very early stages.

Visibly, since the second half of 2023, new entrants in the on-chain derivatives space have been exploring entirely new business directions: whether it's Hyperliquid's on-chain native leverage or Fufuture's "crypto-backed perpetual options," decentralized derivatives trading products are indeed brewing some seeds of significant change.

For these new-generation protocols, beyond achieving direct competition with CEX in terms of trading speed and cost, and releasing the capital efficiency of long-tail assets on-chain, including meme coins, the more critical aspect is to maximize the binding of interests among the community, trading users, and the protocol based on the on-chain architecture—liquidity providers, trading users, and the protocol itself can form a network of shared interests (taking Fufuture's protocol architecture as an example):

• Liquidity providers earn risk-layered returns through a dual-pool mechanism (high returns from private pools + low risk from public pools);
• Traders participate in high-leverage strategies with any asset, with clear loss limits;
• The protocol itself captures ecological value growth through governance tokens;

This fundamentally overturns the traditional "platform-user" exploitative 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 ecological contributors through DAO, on-chain derivatives finally reveal the true nature of DeFi—not just a trading venue, but a value redistribution network.

This is, in fact, the "DeepSeek moment" that the market has been longing for in on-chain derivatives for years—allowing decentralized derivatives to break through the constraints of trading experience, gradually introducing on-chain native leverage and maximizing capital efficiency, no longer relying on CEX as a necessary link, thus potentially bringing about a larger-scale leap in the market, fostering more boundaryless innovations, and ushering in a new "DeFi summer."

Historical experience tells us that every narrative explosion requires the resonance of "correct narrative + correct timing." Whoever can solve the most painful asset efficiency problem for users at the right moment will grasp the scepter of on-chain derivatives.

In Conclusion

I personally believe that decentralized derivatives 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 revenue-generating tracks in the DeFi ecosystem, but it must truly step out of the shadow of "centralized alternatives," leveraging on-chain native structures and the capital efficiency revolution to achieve self-reform of product forms.

However, the key 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 create a path of "frictionless asset flow—derivatives hedging—compound growth of returns."

From this perspective, when meme coin holders can directly use tokens to participate in trading long-tail crypto assets, and when multi-chain assets can serve as collateral without cross-chain requirements, the form of on-chain derivatives can be considered redefined. This is also the leap thinking of new-generation players like Hyperliquid and Fufuture.

Perhaps the ultimate outcome of decentralized derivatives does not lie in replicating CEX but in creating new demand using the native advantages of the chain (openness, composability, permissionless). The market may have already taken a crucial step.