Kwenta: Perpetuals Powered by Synthetix

In the wake of the FTX collapse, many of the non-custodial on-chain perpetual futures trading platforms began to see more adoption. Traders look toward new venues that don’t have the risk of fund misappropriation by a centralized actor. While we have explored some of the perpetual trading platforms in previous reports, including GMX and dYdX, Gains Network and Mycelium, and Rage Trade, we look towards another option gaining traction: Kwenta. What started out as an internal front-end for Synthetix before splitting into its own project, Kwenta aims to use the power of Synthetix in order to produce a perpetual futures trading experience that rivals CEXs like Binance.

Kwenta Overview

Kwenta is a decentralized derivatives trading platform built on Optimism and powered by synthetic assets created through Synthetix. The primary assets traded are perpetual futures contracts, but Kwenta also has a spot exchange to allow for easy synth swapping and acts as an exchange front-end for Synthetix. It also includes a direct integration with 1inch for swaps from synths to other ERC-20 tokens.

Kwenta offers only sUSD-margined futures, which means sUSD is the sole asset that can be used as collateral and as the primary trading pair. This allows for users to easily denominate their PnL in USD and easily swap to other Synthetix assets. Kwenta’s perpetual futures take advantage of liquidity created by SNX stakers who essentially take the other side of every trade. Similar to GLP for GMX’s perpetual futures, SNX represents the “house” where the PnL from traders changes the value of the debt pool incurred by SNX stakers, who also receive all trading fees. When traders profit, value is taken from the debt pool, and vice versa when they lose. Kwenta has traditionally only used isolated margin where balances are applied to one singular asset contract, but they have recently added a beta of cross margin where a single margin account can be used across many different trades.

Trades can be executed with up to 25x leverage either long or short with no price impact. Synth pricing is based on Chainlink oracle data. There are 18 tokens listed including most of the major L1 and DeFi names. The protocol plans to support real-world asset trading in the future, but this is dependent on Synthetix’s willingness to create these synths.

Funding Rates, Fees, and Liquidations

Funding rates on Kwenta function based on skew in open interest at an hourly cadence. When there is more value, either long or short, those on the heavier weighted side pay a fee. Because mismatched open interest also means SNX stakers take on the remainder of the exposure on the lower value side, they receive their fair portion of the funding rate as well. For instance, if there is $100,000 long ETH and $50,000 short ETH, longs will have to pay shorts a significant funding rate every hour, with half of it flowing back to SNX stakers. There is also a dynamic protocol fee on the open and close of every trade between 0.01% and 0.4% dependent on asset volatility. It seems this fee generally sits between 0.3% and 0.35%. There is also a flat 0.02% cross-margin fee and 0.03% fee for placing a limit or stop orders. All fees flow back to SNX stakers.