Perpetual liquidity pools

The rise of perpetual futures has transformed crypto trading, allowing users to speculate on asset prices without expiration dates. Perpetual liquidity pools have emerged as a key innovation, enabling decentralized perpetual futures trading while ensuring deep liquidity across market conditions.

The perpetual liquidity pool model blends the mechanics of perpetual futures contracts with automated liquidity provisioning, creating a seamless trading experience on decentralized exchanges (DEXes).

Unlike traditional futures contracts that have expiration dates, perpetual futures allow traders to hold leveraged positions indefinitely, as long as they maintain sufficient collateral. These contracts rely on funding rates, periodic payments between long and short traders, to keep prices aligned with the spot market.

Perpetual futures are a core feature of decentralized trading platforms like GMX, dYdX and Gains Network, allowing users to engage in margin trading without centralized intermediaries. However, maintaining deep liquidity for perpetual contracts remains a challenge - one that perpetual liquidity pools aim to solve.

How perpetual liquidity pools work

Perpetual liquidity pools are designed to provide liquidity for perpetual futures contracts while mitigating risks for liquidity providers (LPs). Instead of just holding spot assets, these pools offer collateral for leveraged trading.

Key features of perpetual liquidity pools

• Liquidity for perpetual swaps

LPs contribute assets that serve as collateral for perpetual contracts.

Traders borrow from the pool to enter leveraged long or short positions.

• Dynamic pricing & risk management

Perpetual AMMs (Automated Market Makers) use funding rate mechanisms to balance demand between long and short positions. Price oracles ensure fair pricing, reducing the risk of manipulation.

• Earning yield from trading fees & funding rates

LPs receive a portion of trading fees and funding rate payments, compensating for potential losses. Some models use hedging mechanisms to reduce impermanent loss and price divergence risks.

• Decentralization & permissionless access

Unlike centralized perpetual exchanges (such as, for instance, Binance Futures), perpetual liquidity pools operate transparently on-chain, allowing anyone to participate as an LP or trader.

Advantages of perpetual liquidity pools

• Continuous liquidity

Since LPs provide collateral directly for perpetual swaps, traders can enter and exit positions without relying on order books.

• Yield opportunities for LPs

In addition to earning trading fees, LPs may benefit from funding rate payments when demand is imbalanced.

• Decentralized leverage trading

By integrating perpetual liquidity pools, DEXes can offer non-custodial leverage trading, eliminating reliance on centralized exchanges.

• Capital efficiency

Some protocols use synthetic assets or dynamic hedging strategies to minimize capital lock-up while maximizing liquidity.

Challenges & considerations

• Impermanent loss & liquidation risks

If an LP provides liquidity to a highly volatile market, sudden price swings can lead to impermanent loss. Poor risk management can result in liquidations, where traders’ positions are forcibly closed to cover losses.

• Smart contract vulnerabilities

*Like all DeFi products, perpetual liquidity pools are exposed to smart contract exploits - if not properly secured.

Perpetual liquidity pools represent a breakthrough in decentralized derivatives trading, allowing traders to access leverage while ensuring deep, automated liquidity. By merging AMMs, funding rate mechanics and risk management tools, these pools create a more capital-efficient and decentralized alternative to traditional perpetual futures exchanges. As DeFi continues to evolve, perpetual liquidity pools could play a key role in unlocking non-custodial leverage trading at scale, bringing deeper liquidity and financial innovation to the ecosystem.

Stay tuned for upcoming 1inch DeFi Academy posts diving into the most exciting concepts and trends in DeFi!