The derivatives DEX (decentralized exchange) sector is currently experiencing intense competition. While overall market trading volume is declining, new protocols continue to emerge. In this shrinking market, traders are becoming more sensitive to various incentive measures and yield rates, making the battle for user attention among derivatives DEXs increasingly fierce.
Since late March, the trading volume of derivatives DEXs has generally been on a downward trend. Among the six major derivatives DEX protocols, five have shown a decline in trading volume, with Kwenta being the only exception, demonstrating growth against the trend.
Understanding the Key Players
Kwenta is a perpetual trading front-end built on Synthetix, accounting for over 95% of Synthetix's trading volume and revenue growth. Synthetix is a liquidity provisioning protocol with over $400 million in Total Value Locked (TVL), providing the liquidity pools for front-ends like Kwenta.
The order book model DEX, dYdX, still occupies nearly half of the entire market's trading volume. However, among the liquidity pool model derivatives DEXs, GMX is facing significant competition from Kwenta and Level. This week, the trading volumes of both Kwenta and Level surpassed that of GMX.
GMX's trading volume peaked in mid-April and has shown a consistent downward trend since then. Its current trading volume levels are comparable to those seen in late 2022.
Kwenta, which launched in late 2022, began a trading incentive program in mid-February, resulting in substantial volume growth. The protocol began using OP tokens as incentives in late April, leading to noticeable volume growth in May.
Level's trading volume also peaked in mid-April, reaching $2 billion in weekly volume before declining. However, the week of May 22nd saw a rebound in activity.
Drivers Behind the Volume Growth
Incentive Programs and Lower Costs
Kwenta's counter-trend growth appears to be primarily driven by two factors. First, the platform offers substantial trading incentives. Beyond the protocol's native token incentives, Kwenta began distributing 130,000 OP tokens weekly starting April 26th. From May 10th to August 30th, this increased to 330,000 OP tokens weekly, worth approximately $500,000 at market prices.
Second, Kwenta's trading fees are significantly lower than GMX's. Kwenta charges 0.02% to 0.06% depending on whether the user is a taker or maker, while GMX charges a flat 0.1% trading fee plus borrowing fees for positions. For genuine traders, this makes trading on Kwenta more cost-effective.
Level has also implemented trading incentives. Users receive 1 LEVEL Loyalty token (lyLVL) for every $1 paid in trading fees. The platform distributes 10,000 LVL tokens daily based on each user's proportion of the total lyLVL supply. These rewards must be claimed within 24 hours.
Beyond these basic rewards, Level also features a Ladder reward mechanism. When daily platform revenue exceeds certain thresholds, additional LVL tokens are added to the incentive pool. These rewards accumulate and are distributed weekly.
The Ladder rewards target the top 20 traders on the weekly leaderboard. Rankings are determined by the number of points traders accumulate through their trading fee contributions to the protocol, multiplied by a boost factor. This boost factor increases with the amount of LVL tokens staked on the platform—every 1,000 LVL staked increases the boost factor by 1%.
Over the past six months, revenue exceeded $100,000 on 46 days (25% of all days). Revenue surpassed $150,000 on 19 days, $200,000 on 8 days, and $250,000 on just 2 days.
The order book model DEX dYdX has maintained high trading incentives since its launch. Although incentive tokens have been reduced twice, the protocol still distributes approximately 1.58 million DYDX tokens per epoch, worth about $3 million at current market prices. This translates to daily incentives of around $100,000, among the highest in the current derivatives DEX landscape.
Sustainability of Incentive Models
The impact of trading incentives on token selling pressure and overall sustainability requires careful consideration.
In Kwenta's incentive structure, ecosystem OP token incentives constitute the majority, while protocol token incentives are gradually decreasing, resulting in less selling pressure on the native token. Additionally, Kwenta's trading incentives are distributed weekly with a lock-up period—early unlocking requires burning a portion of the tokens. However, the OP incentives are currently scheduled to end on August 30th. Without continuation measures, trading volume could decline significantly afterward.
Level's incentive program relies entirely on protocol tokens, distributed daily without a lock-up period, creating substantial selling pressure on the native token. Furthermore, its Ladder incentive system focuses on boosting trading volume by providing substantial rewards to the top 20 users, far exceeding what regular users receive. This approach likely results in highly concentrated trading volume.
dYdX also faces market scrutiny due to its substantial token incentives and ongoing token unlocks. Many participants are awaiting the launch of dYdX chain and modifications to its token mechanism.
Analyzing Real Trading Volume
Given the presence of trading incentives, it's essential to analyze trading volume to understand the genuine trading activity. Here's a brief analysis of user numbers, trading volume, concentration, and position sizes across several liquidity pool model derivatives DEXs:
GMX's user base is 4-5 times larger than other projects, with position sizes significantly exceeding competitors—3 times larger than Kwenta and 5 times larger than Gains Network.
Kwenta and Level show significantly higher average trading volume per user compared to projects without incentive programs.
Kwenta's 30-day average trading volume per user is approximately $1.6 million, four times that of GMX. The top five traders account for 33.35% of volume, indicating moderate concentration. With 2,986 users, Kwenta ranks first in the second tier. Position sizes fluctuate between $40-60 million.
Level's 30-day average trading volume per user reached $5.76 million, 15 times that of GMX. Trading volume is highly concentrated, with the top five traders accounting for nearly 75% of volume. With position sizes of only $2.6 million and fewer than 600 users, it appears that a significant portion of activity comes from users engaging in incentive farming rather than genuine trading.
Overall, GMX remains the sector leader with significant advantages in user numbers and position sizes. Kwenta appears to have more genuine users with relatively dispersed trading volume. Its incentive measures seem effective at attracting users who might then be retained through better liquidity depth and lower fees. Level, however, shows signs of high incentive farming activity and significant inflationary pressure.
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Recent Development Plans
GMX
Based on community information, the GMX team attributes declining trading volume and yields primarily to overall market conditions.
GMX's recent focus has been launching its V2 version. The test version was released on May 17th, allowing users to participate in testing. Key changes include:
- Transforming GLP from a comprehensive pool to separate single pools for each trading pair, enabling the addition of high-risk assets through isolation
- Introducing two asset types: trading pairs supported by native assets like BTC and ETH, and synthetic asset trading pairs fully backed by USDC
- Traders can choose liquidity from different pools
- The multiple pool structure increases complexity for liquidity providers, who must analyze each pool's usage and yield changes
- Adding funding rates and price impact factors to balance long and short positions
Kwenta
Kwenta's development is closely tied to Synthetix. Both belong to the same ecosystem, with Synthetix providing liquidity services and Kwenta offering front-end services and user acquisition.
On May 25th, Synthetix founder Kain Warwick proposed several ideas for Synthetix's future development, including:
- Using SNX for trading incentives, with plans to allocate 5-10 million SNX to incentive programs
- Considering adding passive SNX staking to expand participation and pool size (previously requiring active staking where participants needed to outperform the entire staking pool)
- Subsidizing front-end costs (currently, front-end operator revenue primarily goes to SNX stakers, creating insufficient long-term incentives)
- Allocating a percentage of treasury SNX (e.g., 10 million SNX) to subsidize front-end fees
These proposals address user, capital, and product aspects, potentially providing significant incentives for projects built on Synthetix if implemented.
Level
In May, Level community voting approved adding new cross-chain functionality with a migration to Arbitrum. The protocol has already deployed LVL token liquidity pools on Arbitrum, enabling trading. Front-end trading services are expected to launch in mid-June. Given Arbitrum's substantial active user base and capital, this migration could attract new users and funds.
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Frequently Asked Questions
What is a derivatives DEX?
A derivatives DEX is a decentralized exchange that allows users to trade derivative products like perpetual contracts without intermediaries. These platforms use smart contracts and liquidity pools instead of traditional order books, enabling permissionless trading with self-custody of assets.
Why are trading incentives important for derivatives DEXs?
Trading incentives help protocols attract users in a competitive market by offsetting trading costs and providing additional yield opportunities. These programs are particularly effective during market downturns when traders become more sensitive to costs and rewards, though their sustainability depends on careful tokenomics design.
How do I evaluate the real trading volume on a DEX?
Look beyond total volume figures to examine user distribution, average trade size, and concentration ratios. Platforms with highly concentrated volume among few users might indicate incentive farming rather than organic activity. Also consider the ratio of open interest to trading volume, as genuine trading typically maintains healthier position sizes relative to volume.
What are the advantages of liquidity pool models versus order book models?
Liquidity pool models offer continuous liquidity without relying on market makers, typically with lower entry barriers for liquidity providers. Order book models provide more familiar trading interfaces for traditional traders and potentially better price discovery for liquid markets, though they often require more complex infrastructure and may have higher centralization components.
How sustainable are current incentive models in DeFi?
Sustainability varies significantly across protocols. Models relying heavily on native token emissions without sufficient utility create inflationary pressure. More sustainable approaches incorporate external revenue sources, implement lock-up periods, gradually reduce emissions, and align incentives with long-term protocol health rather than short-term volume metrics.
What should traders consider when choosing a derivatives DEX?
Beyond incentives, evaluate trading fees, liquidity depth, available assets, user experience, security audits, and the protocol's track record. Also consider the transparency of the development team, community governance processes, and the overall health of the ecosystem in which the DEX operates.