Resolv: How big is the perpetual futures market

INTRODUCTION

Resolv’s core strategy is based on perpetual futures. Previously, we looked into stability of the yield generated by these instruments. However, it is also important to assess market volume of perpetual futures. Can this level of yield be replicated in a scalable instrument, such as stablecoin?

In this article we analyze the perpetual futures market (as measured at top-5 trading venues — Binance, Deribit, Bybit, OKX, and BitMEX) in the context of two key metrics:

• Open Interest. Shows current aggregated volume of existing futures trades. It is a proxy for measuring market capacity — how much trading volumes it can absorb before becoming unbalanced in terms of demand and supply. As we will see, current open interest in the ETH and BTC perpetuals on the most liquid exchanges is approximately $25 billion. Based on 2023 dynamics, this number can be expected to increase up to $50 billion through 2024.

• Daily trading volume. This is a metric of liquidity, and the higher the liquidity, the lower the slippage (impact of a specific trade on price of the asset that is traded). Low slippage is needed for stablecoin minting and burning to stay efficient. From trading volumes perspective, perpetuals account for about $75-$100 billion daily liquidity and already dominate spot markets by around 5 times, making them the most liquid instruments in crypto.

Let us start our deeper dive into those metrics with one specific type of perpetual futures — inverse perpetuals. In inverse perpetuals, both margining and settlement are done in underlying coins, such as BTC or ETH. At Resolv Labs we focus on integrating these instruments first because they are not exposed to other stablecoins, meaning that a delta-neutral strategy does not carry the risks of such stablecoins depegging.

OPEN INTEREST — INVERSE PERPETUALS

As mentioned above, open interest (OI) is a crucial market depth indicator. It shows total amount of futures positions that are currently open on the exchanges and gives understanding of how Resolv’s large volume trades could impact the funding rate.

The chart below shows the open interest dynamics of inverse perpetuals denominated in ETH and BTC for the past 1.5 years.

As for now, the protocol starts with ETH since it is native for most of the EVM networks where the majority of active DeFi users operate. Ether-backed delta-neutral strategy also has the best combination of liquidity and yield (one of the reasons is ETH staking yield). However, expansion of the strategy maintained by Resolv to include Bitcoin will unlock 3 times liquidity as seen from the chart.

However, there are not just BTC and ETH denominated perps but also numerous altcoin-margined ones. However, across overall markets for inverse perpetuals, only 13% of open interest is generated from perpetual futures with altcoins as underlying. While they might potentially generate a higher yield, they also pose higher liquidity risk. So, we will watch them closely and consider their integration when the right time comes.

Inverse perpetual futures are solid enough to support initial growth of Resolv. Accessing further liquidity will be achieved by utilizing stablecoin-margined perpetuals.

STABLECOIN-MARGINED PERPETUALS MARKET

Linear (or stablecoin-margined) perpetuals are margined and/or settled in stablecoins. Expanding to these instruments exposes the protocol to other stablecoins, but this exposure can be managed through synthetic hedging techniques. For instance, borrowing stablecoins in lending protocols against Ether or Bitcoin as collateral provides necessary hedging effect.

How large are the linear perpetual markets compared to the inverse instruments? As seen from the chart, an aggregate stablecoins-margined perps OI in BTC and ETH across largest exchanges is about 4 times larger than inverse perpetuals OI.

Based on the above, liquidity currently available as the protocol backing stands at $25 bn and has been growing consistently.

In these considerations, we did not take into account liquidity located on decentralized exchanges. Currently, three of the leading platforms — GMX, dYdX, and Synthetix — account for about $700mn of open interest. With the next bull run in crypto markets, we at Resolv Labs are optimistic that DEX value proposition will help attract more market participants. With that in mind, we plan to integrate Resolv with leading perpetual DEXes to diversify exposure.

Resolv Labs plans to integrate all BTC and ETH inverse and linear perpetuals from the most liquid venues, such as Binance, Bybit, OKX, and Deribit, to access the most important liquidity pockets. Now that we have assessed open interest of these instruments, let us look closer at daily trading volumes in comparison with the spot markets.

LIQUIDITY: SPOT VS PERPETUALS MARKETS

To help us understand the overall market liquidity Resolv plans to operate on, we consider traded volume, which serves as an indicator for how resistant the markets are to slippage associated with buying or selling assets.

Across most liquid exchanges, for the past 18 months daily trading volume of the perpetual futures was on average 5 times higher than the spot market trading volume. Thus, perpetuals are the most liquid type of instruments in the market currently.

FINAL NOTES

Putting things into perspective, what can we expect when the market capitalization of prime digital assets doubles? Previous 2x jump in crypto prices was accompanied with the 2.6x increase of OI and 3x increase in trading volume of perpetual futures. Doing very simple math, the next twofold growth in prices can drive the perpetuals market to the area of $50bn+ open interest and more than $250bn daily trading volume.

Strong liquidity and market depth are good news. However, any market can experience a situation of temporary low liquidity, when it is advisable to time the actions carefully to avoid losses due to price slippage at execution. Applying this to Resolv, it means that minting and redeeming its tokens would make better sense in batches to ensure better economic results. Resolv Labs is also planning to assist protocol users by implementing better execution management solutions, such as slippage monitoring and time weighted average price (TWAP) orders. However, needless to say, the most important part of the framework is integrating with the trading venues with the most consistently immense liquidity.