Perpetual Future Contracts in Centralized and Decentralized Exchanges: Mechanism and Traders' Behavior

Abstract

This study presents a groundbreaking Systematization of Knowledge (SoK) initiative, focusing on an in-depth exploration of the dynamics and behavior of traders on perpetual future contracts across both centralized exchanges (CEXs), and decentralized exchanges (DEXs). We have refined the existing model for investigating traders' behavior in reaction to price volatility to create a new analytical framework specifically for these contract platforms, while also highlighting the role of blockchain technology in their application. Our research includes a comparative analysis of historical data from CEXs and a more extensive examination of complete transactional data on DEXs. On DEX of Virtual Automated Market Making (VAMM) Model, open interest on short and long positions exert effect on price volatility in opposite direction, attributable to VAMM's price formation mechanism. In the DEXs with Oracle Pricing Model, we observed a distinct asymmetry in trader behavior between buyers and sellers. Such asymmetry might stem from uninformed traders reacting more strongly to positive news than to negative, leading to a tendency to accumulate long positions. This study sheds light on the potential risks and advantages of using perpetual future contracts within the DeFi space while provides mathematical basis and empirical insights based on which future theoretical works can be configurated, offering crucial insights into the rapidly evolving world of blockchain-based financial instruments.