Racing in Vail, Colorado. Source: Photo by Shichou.

Which approach will win the race?

Perpetual Swaps are emerging in Decentralized Finance (DeFi) in two different forms. Either using limit order books like their centralized counterparts, or using an Automated Market Maker (AMM) approach. In this article we review the current approaches and place a bet on which one will make the race in the medium term.

1. Introduction

Perpetual swaps offer the investor a simple way to get leveraged long and short exposure to an asset. The contract is similar to that of a traditional future. BitMEX introduced perpetual swaps as a new product in 2016 [1] for BTCUSD. Other exchanges such as Deribit, FTX, Binance…

Photo by Jen Theodore on Unsplash

What can we learn from 1.9 million order book observations?

We investigate whether imbalanced order books lead to price changes towards the thinner side of the book. That is, by this hypothesis prices decrease when limit order books have large volumes posted at the ask side relative to the bid side, and if order books are more heavy on the bid side then prices increase. We test this hypothesis and assess whether order book imbalance information can be exploited to profitably predict price movements in the ETHUSD market.

Order book imbalance

We follow the literature, e.g., Cartea et al. (2015), and define the order book imbalance as

Vasili Shichou

Risk Management quant by day, algo trading researcher by night | MSc Computer Science/PhD Economics

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