Perpetual Futures

Autodeleveraging: Impossibilities and Optimization ArXiv ID: 2512.01112 “View on arXiv” Authors: Tarun Chitra Abstract Autodeleveraging (ADL) is a last-resort loss socialization mechanism for perpetual futures venues. It is triggered when solvency-preserving liquidations fail. Despite the dominance of perpetual futures in the crypto derivatives market, with over $60 trillion of volume in 2024, there has been no formal study of ADL. In this paper, we provide the first rigorous model of ADL. We prove that ADL mechanisms face a fundamental \emph{“trilemma”}: no policy can simultaneously satisfy exchange \emph{“solvency”}, \emph{“revenue”}, and \emph{“fairness”} to traders. This impossibility theorem implies that as participation scales, a novel form of \emph{“moral hazard”} grows asymptotically, rendering `zero-loss’ socialization impossible. Constructively, we show that three classes of ADL mechanisms can optimally navigate this trilemma to provide fairness, robustness to price shocks, and maximal exchange revenue. We analyze these mechanisms on the Hyperliquid dataset from October 10, 2025, when ADL was used repeatedly to close $2.1 billion of positions in 12 minutes. By comparing our ADL mechanisms to the standard approaches used in practice, we demonstrate empirically that Hyperliquid’s production queue overutilized ADL by $\approx 28\times$ relative to our optimal policy, imposing roughly $653 million of unnecessary haircuts on winning traders. This comparison also suggests that Binance overutilized ADL far more than Hyperliquid. Our results both theoretically and empirically demonstrate that optimized ADL mechanisms can dramatically reduce the loss of trader profits while maintaining exchange solvency. ...

Perpetual Demand Lending Pools ArXiv ID: 2502.06028 “View on arXiv” Authors: Unknown Abstract Decentralized perpetuals protocols have collectively reached billions of dollars of daily trading volume, yet are still not serious competitors on the basis of trading volume with centralized venues such as Binance. One of the main reasons for this is the high cost of capital for market makers and sophisticated traders in decentralized settings. Recently, numerous decentralized finance protocols have been used to improve borrowing costs for perpetual futures traders. We formalize this class of mechanisms utilized by protocols such as Jupiter, Hyperliquid, and GMX, which we term~\emph{“Perpetual Demand Lending Pools”} (PDLPs). We then formalize a general target weight mechanism that generalizes what GMX and Jupiter are using in practice. We explicitly describe pool arbitrage and expected payoffs for arbitrageurs and liquidity providers within these mechanisms. Using this framework, we show that under general conditions, PDLPs are easy to delta hedge, partially explaining the proliferation of live hedged PDLP strategies. Our results suggest directions to improve capital efficiency in PDLPs via dynamic parametrization. ...

Agent-Based Simulation of a Perpetual Futures Market ArXiv ID: 2501.09404 “View on arXiv” Authors: Unknown Abstract I introduce an agent-based model of a Perpetual Futures market with heterogeneous agents trading via a central limit order book. Perpetual Futures (henceforth Perps) are financial derivatives introduced by the economist Robert Shiller, designed to peg their price to that of the underlying Spot market. This paper extends the limit order book model of Chiarella et al. (2002) by taking their agent and orderbook parameters, designed for a simple stock exchange, and applying it to the more complex environment of a Perp market with long and short traders who exhibit both positional and basis-trading behaviors. I find that despite the simplicity of the agent behavior, the simulation is able to reproduce the most salient feature of a Perp market, the pegging of the Perp price to the underlying Spot price. In contrast to fundamental simulations of stock markets which aim to reproduce empirically observed stylized facts such as the leptokurtosis and heteroscedasticity of returns, volatility clustering and others, in derivatives markets many of these features are provided exogenously by the underlying Spot price signal. This is especially true of Perps since the derivative is designed to mimic the price of the Spot market. Therefore, this paper will focus exclusively on analyzing how market and agent parameters such as order lifetime, trading horizon and spread affect the premiums at which Perps trade with respect to the underlying Spot market. I show that this simulation provides a simple and robust environment for exploring the dynamics of Perpetual Futures markets and their microstructure in this regard. Lastly, I explore the ability of the model to reproduce the effects of biasing long traders to trade positionally and short traders to basis-trade, which was the original intention behind the market design, and is a tendency observed empirically in real Perp markets. ...

Exploring the Impact: How Decentralized Exchange Designs Shape Traders’ Behavior on Perpetual Future Contracts ArXiv ID: 2402.03953 “View on arXiv” Authors: Unknown Abstract In this paper, we analyze traders’ behavior within both centralized exchanges (CEXs) and decentralized exchanges (DEXs), focusing on the volatility of Bitcoin prices and the trading activity of investors engaged in perpetual future contracts. We categorize the architecture of perpetual future exchanges into three distinct models, each exhibiting unique patterns of trader behavior in relation to trading volume, open interest, liquidation, and leverage. Our detailed examination of DEXs, especially those utilizing the Virtual Automated Market Making (VAMM) Model, uncovers a differential impact of open interest on long versus short positions. In exchanges which operate under the Oracle Pricing Model, we find that traders primarily act as price takers, with their trading actions reflecting direct responses to price movements of the underlying assets. Furthermore, our research highlights a significant propensity among less informed traders to overreact to positive news, as demonstrated by an increase in long positions. This study contributes to the understanding of market dynamics in digital asset exchanges, offering insights into the behavioral finance for future innovation of decentralized finance. ...