While the crypto market is famous for its wild price fluctuations, for many crypto traders (better known as highly leveraged gamblers), that's just not thrilling enough.

This is where perpetual futures, or perps for short, come into play. They've become a beloved financial tool in the crypto world, allowing degens like you and me to trade the already wildly unpredictable crypto assets with leverage.

The allure of massive wins and an irresistible urge to hit those buy and sell buttons has cemented perps as the ultimate sport in crypto.

Current landscape

Since it was first introduced in 2016 on the Bitmex exchange, the lion’s share of perps volume has remained on centralized exchanges, occupying roughly 99% of the market share.

While it may seem straightforward to decide between trading on a DEX or a CEX, with one being centralized and the other not, it's not that simple.

At first glance, the advantages of decentralized exchanges are clear. You can self-custody and prevent an SBF V2 from stealing your shekels.

However, the complexity of onboarding and the diverse technical infrastructures of DEX offerings are the primary reasons for their limited adoption compared to their centralized counterparts.

For centralized exchanges, the implementation of perps is relatively straightforward—create a CLOB, hire professional market makers to fill the orders, and match them on your own server, and boom, you’ve got yourself a perp exchange.

In this setup, traders know exactly what they’re signing up for—optimal prices with minimal slippage at the expense of their funds, which the exchange controls.

The situation regarding DEXes is less clear, as the market encompasses various approaches, each with its own set of risks. First, decentralized exchanges are subject to the dynamic nature of blockchains, including gas costs, block speeds, and other factors that can hinder performance.

If that wasn’t enough, decentralized perp exchanges must also create sophisticated economic models that replace the role of traditional market makers of CEXs.

Several designs have been experimented with to tackle this problem over the years, all with different tradeoffs.

Although protocols such as Drift and Perp have unquestionably drawn in a large number of users, totaling over 500,000 unique traders between the two, these exchanges have adopted a hybrid design that incorporates both a Limit Order Book (LOB) and an Automated Market Maker(AMM).

This design gives traders optimal pricing due to on-demand liquidity supplied by market makers. The AMM merely enhances liquidity, guaranteeing that users' orders are consistently executed. While this is a positive development, it's important to note that market makers still handle a large chunk of trades on these platforms.

Exchanges such as GMX and Synthetix offer a different approach where liquidity pools (LP) are the primary liquidity source for trades. This setup removes the intermediaries, i.e., market makers, and replaces them with individuals supplying liquidity to a pool.

While this is a significant advancement for decentralization, it does subject the LPs to counterparty risk, effectively making them analogous to "the house" in the context of how casinos operate. Only in this casino, the house can actually lose.

As mentioned, all designs have inherent tradeoffs, but if we are rooting for team decentralization, the latter model is the one we should be betting our house on.

With that in mind, what if there was an exchange that improved upon the liquidity pool model seen in GMX or Synthetix?

One that addresses some of its challenges, such as the counterparty risk linked to LPs and the absence of incentives for directional traders to mitigate their losses.

Enter Avantis

Avantis is a next-generation perp DEX powered by Base, a Layer 2 scaling solution built on top of Ethereum, fully backed by Mr. Brian Armstrong's perfectly bald head.

The exchange offers one-click trading, similar to centralized exchanges, and multiple asset classes, such as crypto, commodities, and forex.

Not to mention, its UI is beyond sleek.

Perfecting the Liquidity Pool Model

While the design may seem simple on paper, the liquidity pool model requires an intricate balance of incentives between traders and liquidity providers (LPs) for the exchange to remain solvent. Using lessons from the past, Avantis addresses some of the pitfalls associated with this setup.

In the context of trading, perp dexes often face a common challenge: an unbalanced Open Interest (OI) rate skew.

Arbitrageurs typically help close the gap between long and short positions, while traders are not directly incentivized to hedge their positions and cover losses. Avantis tackles this issue two-fold.

Firstly, the platform hosts a dynamic fee structure that adjusts to the OI in real time based on the skew between long and short positions. This means that when we return to the stage of the market when everyone and their mother are entering long positions, the platform will lower the fees for short positions to incentivize balanced trading.

Secondly, Avantis has developed a 0 to 1 innovation with the Loss Protection mechanism that incentivizes traders who take the opposite side of the consensus trade.

Loss protection is effectively a 20% rebate on traders’ losses! This creates strong incentives for directional trading and hedging.

Both mechanisms are implemented to help balance the platform's OI skew and increase liquidity providers' earnings. To this day, more than $100,000 has been paid out to traders in loss protection rebates.

In the liquidity pool model, LPs are an integral part of the equation, acting as decentralized market makers. This enables the exchange to provide traders with deep liquidity and tight spreads. However, depositors are directly exposed to counter-party risk in this setup, leading to substantial losses if traders turn profitable.

On most perp dexes that employ the LP model, the pools are passive by nature, with no way for users to adjust risk parameters. This means that all depositors share protocol wins and losses equally.

Avantis has introduced time and risk parameters for LPs to attract more sophisticated liquidity providers. This innovation allows depositors to choose their risk tranches and soft-lock their capital for up to 5x fee rewards and XP boosts.

The combination of Loss protection for traders and the ability for LP depositors to fine-tune their risk management with tranches and time locks makes up for a strong value proposition in the expanding perp DEX sector.

Customisability and flexibility are everything for LPs, and Avantis offers exactly that.

Technical overview

A critical part of any trading venue is the underlying trading engine that makes the platform tick.

Typically, decentralized perp exchanges employ a hybrid setup, where the settlement occurs on-chain, but the actual trades are facilitated through an in-house server.

Avantis takes it a step further by running the trading engine fully on-chain. The trading engine is also responsible for liquidations, and in the future, the team plans to open-source its liquidation bot so that anyone in the community can run liquidators.

For a trade to occur, the platform has to know the accurate pricing of any given asset. By using not one but two separate oracle networks, Avantis can obtain the best of both worlds.

While Pyth's on-demand solution offers the much-needed low latency for a great user experience, Chainlink’s decentralized network is used as a safety measure in case of an outage of Pyth's network or suspected malicious activity, offering high-security assurances for users.

Last but not least, USDC vaults are the protocol's lifeblood and are designed to provide sufficient liquidity for all markets. These vaults serve as counterparties to traders and thus assume a certain risk. In return for this service, users who deposit their funds into one of the available LP vaults (Junior or Senior) receive 60% of the protocol revenue from trading fees.

These pools absorb gains and losses from the protocol in varying proportions, allowing for more advanced market-making strategies on the exchange.

LPs receive 60% of the trading fees, while the protocol treasury receives the remaining 40%. This allocation is designed to act as a safety net for LPs during unexpected protocol losses. However, under normal circumstances, these funds will support trading competitions, reward campaigns, and provide trader rebates.

Beyond cryptocurrencies

What if, alongside magical internet money, you could trade real-world assets like commodities or forex and do it in a non-custodial manner?

Avantis enables users to diversify their portfolio across various asset classes using oracle networks that track real-time prices and a synthetic architecture for RWA treasuries, all while operating on-chain.

The platform currently supports tokenized RWA treasuries like gold and silver and various FX pairs such as EUR-USD and JPY-USD. Traders have quickly seized this opportunity, leading to a cumulative volume of over 100 million for RWA perps facilitated by Avantis.

Actionable steps

Currently, no token is associated with Avantis, but there are many different things you can do as a user.

With summer in full swing, users can join the Avantis on-chain summer event, a trade-to-earn campaign running until September. The competition offers weekly prizes, with a total prize pool of $250K USDC, exclusive merchandise, and XP boosts.

Alongside the trading competition, users can earn Experience Points(XP) by trading, providing liquidity in the USDC vaults or through referrals. Unlike other points programs, Avantis has introduced a gamified approach by offering quests that participants can complete to receive extra boosts for their XP.

Trade, deposit USDC for yield, refer friends, and earn the right to become an early participant in the Avantis DAO.

And that's not all when it comes to XP points. You can earn XP points for Avantis and Superform simultaneously by depositing USDC into either the Junior or Senior LP vaults through the Superform aggregator. Take advantage of this exciting opportunity to maximize your rewards!

Ecosystem

With Avantis deployed on one of the most popular Ethereum L2s, the potential for synergies and partnerships is immense.

Base belongs to the OP Superchain ecosystem, which means anything deployed there, including Avantis, gains access to a horizontally scalable network of L2 chains that share security, a communication layer, and an open-source development stack.

Composability is DeFI's superpower, and going forward, the goal is to integrate Avantis into the broader Ethereum and Ethereum L2 ecosystem by collaborating with different protocols.

Team and Investors

Avantis was founded by Sehaj and Brank, both distinguished individuals in their respective fields.

Sehaj completed his studies at UC Berkeley and gained experience in Investment Banking (M&A) and at Pantera Capital, one of the largest blockchain venture capital firms.

Brank, on the other hand, contributes engineering expertise, having previously worked at a big data company and a leading fintech company.

Avantis has received support from prominent venture capital firms in the crypto industry. Pantera Capital, Founders Fund, Galaxy Digital, Modular Capital, and others collectively invested $4 million in the seed round. Furthermore, Avantis was among the first six projects to receive funding from the Base Ecosystem Fund in September 2023.

Final thoughts

Decentralized perp exchanges are undeniably abundant across all major ecosystems. Despite handling significant volumes, perp DEXes collectively represent a minuscule fraction of the futures volume compared to centralized exchanges, barely constituting 1% of the total market share. Hence, declaring any DEX platform as a clear winner would be premature.

Decentralized exchanges offer substantial advantages like self-custody and open access. Today, the user experience on DEXes is almost on par with centralized exchanges. The increased regulatory scrutiny that exchanges like Binance receive sets the stage for decentralized DEXes to capture a growing portion of the market from their larger counterparts.

As users become aware of blockchain technology's significant evolution and its benefits, they will seek out protocols that are the most accessible and user-friendly.

In this context, Avantis has a considerable advantage by being integrated into Base, a blockchain ecosystem incubated under the wing of Coinbase.

With its native on-chain wallet solution built within the app, Coinbase has already made it easier for users to access Web3.

This is crucial in the crypto space, and with Coinbase's extensive user base of over 100 million, Avantis can more effectively onboard these users and not only catch up but also surpass its competitors.