This episode dissects the deceptive allure of "zero-fee" decentralized exchanges (DEXs), revealing how hidden costs and structural design choices dictate true execution value and long-term sustainability for perpetuals (perps).
Extended's Architecture & On-Chain Security
- Wrestlon, Head of Crypto Operations at Revolut, details Extended's vision for unified margin across spot and perpetuals, settling all transactions on Starknet (a Layer 2 scaling solution for Ethereum). Extended abstracts Starknet from users, allowing connection with any EVM wallet and deposits/withdrawals from major EVM chains.
- Critical on-chain verifications include self-custody of funds, continuous exchange solvency checks (individual account health leads to overall solvency), and transparent execution logic.
- The system prevents arbitrary liquidations by verifying user liquidatability on-chain against external mark prices.
- Trade execution ensures prices are never worse than user-signed orders.
- "All the funds should be self-custodial. The operator of the exchange... shouldn't have back the user funds." – Wrestlon
The Nuance of Zero-Fee Perp DEX Economics
- The discussion shifts to the contentious "zero-fee" model prevalent in some perp DEXs, contrasting it with Extended's explicit fee structure and its impact on liquidity and total execution cost. Wrestlon argues that user flow and liquidity are symbiotic: growing users attract liquidity, and deep liquidity attracts users.
- Extended charges a 2.5 basis points (bps) taker fee and zero maker fee, using maker rebates to incentivize tighter spreads.
- Total cost of execution includes both explicit fees and slippage, with zero-fee models often leading to wider spreads due to toxic flow.
- Retail users, as seen at Revolut, often prioritize convenience over minimal fees, suggesting "zero-fee" isn't always the primary driver for a broad user base.
- "Zero fees don't always mean that you will have the lower total cost of execution... if you're paying maker rebates then the makers they can actually quote tighter." – Wrestlon
Navigating Product-Market Fit & Retail Onboarding
- The conversation addresses the challenge of identifying genuine product-market fit amidst airdrop farming and the broader strategy for attracting mainstream retail users to perp DEXs. Wrestlon highlights that perp DEXs possess the strongest product-market fit in crypto, outperforming L1/L2 narratives due to a naturally more efficient business model.
- Market share for perp DEXs has surged from 1-2% (dYdX, GMX era) to 15-20% of global perpetual trading volume, driven by enhanced safety and accessibility (no KYC, self-custody).
- Attracting retail requires solving embedded wallet creation and native fiat on/off-ramps (cards, bank transfers).
- Mobile applications are crucial for retail, potentially offering "pro" and "retail" versions to cater to different user needs.
- "Perps in general... do have the biggest product market across all the categories... the business model itself naturally is more efficient." – Wrestlon
Extended's Yield-Bearing Vaults & Advanced Risk Management
- Wrestlon introduces Extended's new vault system, which allows users to deposit funds, earn yield, and use vault shares as collateral, detailing the intricate liquidation mechanics designed for safety. Users deposit funds into the vault, earning a base yield from trading activity and liquidation fees, plus an "extra yield" based on user activity.
- 90% of vault share value can be used as collateral for trading perpetuals.
- Liquidation of vault shares involves withdrawing funds from the vault, requiring the vault to close a proportional part of its open positions.
- A "force close" mechanism allows the vault to close its exposure at mark price against the most profitable, highly leveraged user if market liquidity is insufficient, preventing direct losses for the counterparty.
- "If the vault cannot close its open exposure on the market via the order book, it's going to close its position right at the mark price against the most profitable and highly leveraged user." – Wrestlon
The Future of Perp DEXs: Cross-Collateral & Decentralized Operators
- Wrestlon outlines Extended's ambitious roadmap, including cross-asset collateral, spot market integration, and the decentralization of the exchange operator, positioning these as key competitive differentiators. Q1 2024 focuses on cross-asset collateral (e.g., wBTC, wETH, USD) by leveraging existing infrastructure for non-stablecoin assets (vault shares).
- The challenge of liquidating non-stablecoin collateral is addressed via an embedded Request for Quote (RFQ) system with market makers, backed by an Auto-Deleveraging (ADL) fallback.
- Q2 2024 will see the launch of spot markets, acknowledging the greater complexity of attracting spot liquidity compared to perpetuals.
- Q3/Q4 2024 targets decentralizing the operator (order matching, etc.) through a validator set, enhancing resilience and creating native token economics.
- "The major complexity is not even the logic itself... you need to have access to a very liquid market, a very liquid spot market." – Wrestlon
Investor & Researcher Alpha
- Capital Flow: Capital is shifting towards perp DEXs with robust on-chain security and innovative collateral mechanisms, particularly those solving cross-asset margin. Projects with transparent, verifiable solvency and execution logic will capture significant market share.
- Market Microstructure: The "zero-fee" narrative is a red herring; total cost of execution (explicit fees + slippage) and maker rebate structures are the true determinants of liquidity and user value. Researchers should focus on spread analysis across various clip sizes and market conditions, not just advertised fees.
- Aggregation Hurdles: Aggregators for perp DEXs face significant hurdles due to disparate collateral management systems and varying trust assumptions across platforms. A "Llama Swap for perps" is unlikely in the near term without a seamless, trustless bridging solution for collateral.
Strategic Conclusion
Perp DEXs are rapidly evolving beyond simple trading venues, integrating sophisticated risk management, yield generation, and cross-chain collateral. The industry's next critical step is to bridge the gap to mainstream retail through seamless fiat on/off-ramps and intuitive mobile experiences, while decentralizing core operations for ultimate resilience and trustlessness.
