Maximize Profits in Perpetual DEX Trading With This Guide | HackerNoon

Did you know that trading volume on DEXs surpassed $3.25 trillion last year? The main reason is that crypto traders are demanding safer alternatives to centralized exchanges, making mastering efficient DEX trading more crucial than ever.

This increase in DEX volume is reflected in the momentum of the self-custody and financial sovereignty narrative following the collapse of large exchanges such as FTX. Record outflows of coins, such as Bitcoin, from major centralised exchanges are evidence of this shift in mindset, as suggested by CoinMetrics data.

However, trading on a DEX comes with its own set of challenges, particularly due to key concepts such as liquidity, latency, and market making (AMM), among others, which are crucial factors for efficient and profitable trading.

Some of these factors are implemented by certain decentralized exchanges, while others improve upon the common DEX features, tailoring them to platform-specific needs, such as leverage in perpetual decentralized exchanges.

💡Why trade on a DEX? – Key advantages over CEXs

• Non-custodial: Users have full control of their private keys.
• Global access: They do not require KYC verification in most cases.
• Lower risk of centralized hacks: There is no single point of failure.

Automated Market Makers (AMMs) and Liquidity on decentralized exchanges like Uniswap?

It is well known that this functionality, intrinsic to DEXs, was first introduced by Uniswap some time ago. Unlike centralized exchanges (CEXs), which rely on order books, DEXs use Automated Market Makers (AMMs) and liquidity pools to facilitate asset exchanges algorithmically.

How does liquidity pools work on Decentralized Exchange (DEX)?

Through this feature, DEXs can offer greater capital efficiency with multi-asset pools that optimize liquidity and reduce slippage. This type of characteristic is particularly popular among certain perpetual DEXs, such as Zeus Exchange, which uses AMM-based liquidity funds with multiple assets, allowing traders to use them for margin in perpetual trading.

Liquidity pools help minimize impermanent loss when selecting low-volatility pools and enable trades with lower price impact due to the dynamic asset weighting based on market demand.

A key player in this ecosystem is the Liquidity Providers (LPs), who must evaluate the performance and risks of pools to maximize their rewards without exposing themselves to unexpected losses. Some incentives include trading fees, funding fees (in the case of perpetual DEXs), and liquidation fees.

🤔 “What is a Liquidity Provider in DeFi? – Entities (individual or legal) that deposit digital assets into a protocol so that other users can exchange tokens on demand.”

Depending on the platform, liquidity can include stablecoins, altcoins like ETH, or high-value assets like Bitcoin, alongside the native token of the DEX—UNI for Uniswap, ZLP for Zeus Exchange, and so on.

It is important to highlight that in the case of Zeus Exchange (and similarly to other DEXs such as GMX or Synthetix), the ZLP token represents a multi-asset liquidity pool, serving as the backbone of liquidity for both leveraged perpetual and spot trading.

💡Multi-Asset Pool: A pool composed of multiple assets, including cryptocurrencies and stablecoins, used to facilitate trading by acting as a counterparty.

Understanding how liquidity pools function on the DEX platforms you choose for regular trading allows you to adjust your risk position and minimize the price impact of each transaction, reducing risks associated with factors such as impermanent loss due to sudden fluctuations.

Understanding leverage in Perpetual DEXs: What you need to know about margin trading – Risks & Rewards

One of the standout features of certain DEXs is the ability to trade with leverage of up to 50x on the initial margin. This feature allows traders to increase their available trading capital, though it also logically increases the risk of the trade.

For example, if a trader has $500 as margin and applies 20x leverage, they can control a position worth $10,000.

Leverage is not exclusive to DEXs or even the crypto market, as it has been present for many years in the Forex market. Essentially, it refers to using borrowed funds to increase potential profits by utilizing the available financial instruments on the platform.

A key aspect here is having the necessary capital for the margin requirement. This prevents liquidations, as if the margin falls below the required threshold, positions may be automatically closed.

Monitoring funding rates

Another crucial consideration for leverage is monitoring funding rates, which apply additional costs to leveraged positions. For instance, if you open a leveraged position on Zeus Exchange, fees are charged to ensure that the price of perpetual contracts remains aligned with the spot price of the underlying asset.

These fees are usually paid at regular intervals (e.g., every few hours) and aim to prevent price discrepancies between the perpetual contract and the oracles

Comparison of leading decentralized trading (DEX) platforms

Table comparing leverage rates across DEX platforms like Zeus Exchange, GMX, and Uniswap V3.

Risk management and Oracles in Perpetual DEX trading

To ensure accurate liquidation levels, some DEXs use decentralized price oracles such as Umbrella Network or Pyth Network, which powers platforms like Segment Finance and Zeus Exchange, among others.

Umbrella Network supports around 12 blockchain networks, including some of the most popular like Solana, Ethereum, BNB Chain, and 5ire Chain.

Alongside Chainlink and Pyth Network, it is part of the new generation of reliable real-time data providers for trading on decentralized platforms—a crucial aspect, especially when trading in perpetual markets with high volatility indices.

Using the TWAP to manage positions effectively

Beyond using oracles to ensure accurate market data and prevent price manipulation, some DEXs employ a mechanism called Time-Weighted Average Price (TWAP)—a strategy used to minimize the impact of large orders, helping traders manage their positions effectively.

Some centralized exchanges, such as Binance, use this type of order, while decentralized options like Zeus Exchange integrate it natively into their platform to protect users from potential market fraud or errors, particularly against flash loan attacks that manipulate the market.

The use of decentralized oracles ensures that platforms have precise liquidation and margin requirements, providing stability and confidence compared to platforms that rely purely on AMM models dependent on internal pool ra

Fees and Swap Costs

In all exchanges (centralized or decentralized), each trade incurs two main costs: trading fees and gas fees.

Depending on the platform type and liquidity model, trading fees are paid to LPs and can take different forms:

• Trading fees: Applied to each transaction
• Funding fees: Costs for maintaining leveraged positions
• Liquidation fees: Charges imposed on positions that fall below the required margin

Depending on the platform, trading fees paid to LPs can range from 0.01% to 0.3%.

On the other hand, gas fees depend exclusively on the blockchain network used and are highly influenced by network congestion. Strategies to reduce costs when trading on decentralized platforms include using Ethereum Layer-2 solutions, selecting pools with dynamic fees, or batching transactions to optimize costs.

Another type of fee to consider is deposit and withdrawal fees. Notably, some DEXs, like Zeus Exchange, do not charge deposit fees as an incentive for users to trade or provide liquidity.

How to reduce gas fees on DEXs for efficient trading?

There is no doubt that one of the major barriers to entry for DEXs was the high fees, especially during times of high blockchain network congestion. Ethereum, historically the place with the deepest liquidity for DEXs, has a long history of examples showing the exorbitant amounts traders have had to pay.

However, there are some strategies for operating efficiently when it comes to reducing fees on DEXs:

• Use Layer 2 networks: Base, Arbitrum, and Optimism are examples of how economical transactions can be.
• Make transactions during off-peak hours: The congestion of any Layer 1 network is often driven by high activity during specific hours, and this congestion directly impacts the fees users must pay.
• Lastly, consider using DEX aggregators to execute swaps at the best cost-benefit ratio.

Latency and underlying technology

A fundamental factor when using a decentralized trading platform is its underlying technology. Depending on the blockchain, the user experience can be seamless or frustrating.

Historically, latency issues were one of the main drawbacks of DEXs, discouraging their use. First-generation blockchains were architecturally limited in handling fast transactions, especially during high demand when gas fees skyrocketed.

Trading Latency: The delay in data transmission across networks, negatively impacting trade execution.

Now, next-generation Layer 1 solutions such as Sui, 5ire Chain, or Hyperliquid offer faster transactions and lower fees. These networks, combined with low-latency oracles, enhance user experience by minimizing the risks of inefficient trading due to execution delays.

Conclusion: Why you should trade on DEXs

Using decentralized platforms for digital asset trading has clear advantages over traditional exchanges. However, their underlying technology remains relatively new, making it challenging for some users to grasp.

With DEX trading volumes increasing in market share compared to major centralized exchanges, and the perpetual DEX sector gaining popularity, understanding the fundamentals of decentralized trading is crucial for effective risk management.

Final recommendations

To conclude, we consider it essential for every trader, whether experienced or not, to take into account the following key aspects of the mechanisms commonly found on decentralised exchange platforms:

• If you plan to participate as a Liquidity Provider (LP), evaluate the benefits and risks of each pool. Some platforms offer incentives through trading fees, funding fees, and liquidation fees.

• Pools with low-volatility assets, such as stablecoins, provide greater stability.

• Whenever possible, use liquidity pools with dynamic fees, like those offered by Zeus or GMX, which can help save on fees during periods of high demand.

• Combine multiple trades into a single transaction to optimise gas costs.

• If using a multichain platform, prioritise operating on a next-generation L1 network or a cost-effective L2 (in Ethereum’s case) for better performance and efficiency.

• To avoid latency issues, trade on fast blockchains such as Solana, Polygon, or 5ire Chain.

• Consider using tools like Flashbots Protect to mitigate exposure to front-running attacks.

• Use stop-loss orders to minimise losses in highly volatile markets, especially in leveraged trading.

• Monitor funding rates to avoid unexpected costs.

• Ensure you maintain adequate collateral to prevent liquidations, particularly in leveraged trading strategies on perpetual DEXs.