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This paper presents a synchronized system of the pool-based spot and perpetual futures DEX with built-in dynamic LP hedging and MEV protection.
Since the introduction of the “xyk” model pioneered by Uniswap V1/V2, the on-chain liquidity market structure has significantly evolved. While groundbreaking, the monolithic approach of constant product AMM had limitations, such as high slippage and inefficient liquidity usage. As the space matured, new DEX architectures emerged, tailored to specific use cases, such as the Stableswap invariant from Curve Finance, the Request-for-Quote (RFQ) system from 0x, batch auctions from CoWSwap, and the concentrated liquidity model of Uniswap V3. Each closes its own unique market needs by improving liquidity providers' user experience in terms of flexibility and/or capital efficiency.
These advancements mirror the evolution of blockchain technology itself. As Ethereum was the first to separate consensus and application logic, enabling developers to create dApps without building their own blockchains but instead leveraging a shared security model, the latest DEX models began to separate liquidity provision from clearing and settlement. In this regard, Uniswap V3 custom liquidity ranges provide LPs greater flexibility in terms of expressing their portfolio preferences and boosting capital efficiency while still receiving shared trade flow from aggregated liquidity curves.
Similarly, as Ethereum moved to a modular scalability approach by separating execution and settlement/validation via applying rollups + data availability layer model, we are witnessing further trends of externalizing management from financial infrastructure in both DEXes and lending markets architectural landscapes. Namely, the Coincidence-of-Wants (CoWS) mechanism from CoW Swap and the emergence of intent-centric architectures like CoW Protocol intents/hooks and Uniswap V4 hooks in the decentralized exchanges DeFi segment.
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This approach enables LPs to express their preferences and requirements through intents, which can include parameters like price, size, and customized trading strategies via conditional orders. The routing problem is being outsourced to external parties - a network of solvers or fillers who compete to satisfy these intents by sourcing liquidity for optimal order execution. This separation allows LPs to focus on defining their desired trading strategies and risk profiles without restrictions to follow any specific rules, such as Uniswap V3 invariant curve, enabling ultimate flexibility in adapting strategies and algorithms to constantly evolving market conditions. While inclusion into a competitive solvers network ensures preserving trade flow by tapping into the liquidity and user base of established meta-aggregators.
At the same time, we witness the growing popularity of the new class of decentralized derivatives exchanges powered by the pool-based architecture. Namely, GMX’s GM pools, Jupiter’s JLP, and Hyperliquid’s HLP products are powered by the perpetual demand lending pools (PDLPs) that lend pool assets to perpetual traders. Where users who want passive yield deposit multiple assets into the ETF-like weighted pool and their assets are lent out to collateralize perp positions.
For example, a trader opens up a 5x leveraged long position by providing 1x collateral and the pool lends out the remaining 4x.
The loan is closed when either:
Unlike other DeFi lending protocols, there is no liquidation bonus and the collateral just goes back to the pool. This is an important difference and when assets don’t leave the pool, lending protocol knows where the borrowed assets are and can reclaim the exact amount that was lent out upon liquidation (application-specific lending).
Powered by the Target Weight Mechanism (TWM), this nature is similar to the CFMMs, but as assets don’t leave the pool, the only moving part is oracle-based prices that affect portfolio weight distribution. This construction is much easier to hedge compared to the CFMMs, as amounts don’t change and we only need to hedge the delta of the underlying assets.
As a result of new passive yield vaults quickly emerged that provide liquidity for the JLP pool and dynamically hedge it with perpetual futures on external exchanges, such as Drift.
Another notable example of an application-specific lending protocol is Panoptic. The protocol applies the same application-specific lending theme to Uniswap V3 LP tokens. The core idea is that a concentrated range position resembles a short put option, and by lending that LP token to an options buyer, Panoptic effectively converts passive range liquidity into convex option-like pay-offs for long speculators.