Perpetual Futures Models
Key Concepts
- Spread - Difference between best bid and best ask.
1. Summary
Perpetual futures protocols use two main models for price discovery and trade execution:
- Peer-to-Pool (AMM) - Trader trades against a liquidity pool. Price varies continuously based on pool supply and demand.
- Central Limit Order Book (CLOB) - Trader trades against visible orders. Price varies based on order book depth and market maker activity.
CLOB is the standard for high-performance perps, used by most major DEXs including Hyperliquid, Phoenix, dYdX and Drift.
2. Peer-to-Pool (AMM)
How It Works
In a peer-to-pool model, traders swap directly against a liquidity pool. Liquidity providers deposit assets into the pool, and traders buy or sell against it. There is no counterparty, the pool is the counterparty.
Price Behavior
- Continuous movement - Price moves with every trade, no gaps
- Pool-driven - Price depends on the ratio of assets in the pool
- Slippage scales with trade size - Large trades move the price significantly
- Always available - Liquidity exists at every price point
Characteristics
| Aspect | Description |
|---|---|
| Liquidity source | Passive liquidity from providers |
| Price discovery | Formula-driven, based on pool state |
| Execution | Instant (if liquidity available) |
| Transparency | Low - pool state visible but formula opaque to most users |
Examples
- Strike Finance (v1)
Pros & Cons
| Advantage | Disadvantage |
|---|---|
| Simple to implement | High slippage for large trades |
| Always has liquidity | Impermanent loss for liquidity providers |
| No need for market makers | Less capital efficient |
| Works well for small trades | Not suitable for professional trading |
3. CLOB (Central Limit Order Book)
How It Works
In a CLOB model, an order book displays all visible buy (bids) and sell (asks) orders. Traders place limit or market orders, and orders are matched by price-time priority. Market makers provide liquidity by posting orders at specific prices.
Price Behavior
Price varies based on order book activity.
| Mechanism | What Happens |
|---|---|
| Limit order | Sits in the order book until the price reaches that level. Adds liquidity while waiting. Executes when someone trades against it. |
| Market order | Executes immediately at the best available price. Consumes existing liquidity, walks the book, and may move the price. |
| Cancel | Removes an order from the book. If it was the best price available, the spread increases. |
Role of Oracle
The oracle confirms the price, preventing large discrepancies between the order book price and prices on other exchanges. If the price depended only on bids and asks, it would be easy to manipulate the price of an asset.
| Function | How Oracle Affects Price |
|---|---|
| Price confirmation | Ensures order book price aligns with external market |
| Manipulation prevention | Prevents artificial price moves through large trades |
| Mark price | Used for liquidation decisions |
| Funding rate | Calculated from the difference between order book and oracle price |
| Risk management | Portfolio margin calculations use oracle as reference |
Characteristics
| Aspect | Description |
|---|---|
| Liquidity source | Active market makers posting orders |
| Price discovery | Order-driven, based on visible bids/asks |
| Execution | Matches against existing orders |
| Transparency | High - all orders visible on-chain |
Examples
- Phoenix - Fully on-chain CLOB on Solana
- dYdX - App-Chain CLOB
- Hyperliquid - High-performance app-chain CLOB
- Drift - Solana perps
Pros & Cons
| Advantage | Disadvantage |
|---|---|
| Best prices for large trades | Requires active market makers |
| High transparency | More complex to implement |
| Capital efficient | May have gaps during low activity |
| Suitable for professional trading | Latency depends on chain |
4. Comparison
| Aspect | Peer-to-Pool | CLOB |
|---|---|---|
| Price movement | Continuous, pool-driven | Discrete, order-driven |
| Liquidity | Passive (pool-based) | Active (market makers) |
| Slippage | High for large trades | Lower (depends on depth) |
| Transparency | Low | High |
| Availability | Always available | Depends on orders |
| Capital efficiency | Lower | Higher |
| Professional trading | Not suitable | Suitable |
| Complexity | Simple | More complex |
5. Which Model for Our Project?
CLOB is the clear choice for a perps protocol.
Reasons:
- Industry standard - Most successful perps DEXs use CLOB
- Better for traders - Tighter spreads, lower slippage for large trades
- Transparency - Users can see all orders and verify fairness
- Professional trading - Supports advanced order types and strategies
- Proven at scale - Phoenix, dYdX, Hyperliquid demonstrate CLOB works on-chain