Flash Depth Data

Search Extension

From the XPL Airdrop Event, Exploring the Future of the Perp Protocol in a $300 Billion Fee Market

2025-08-27 22:09

Read this article in 16 Minutes

The next-generation protocol must not only address risk issues but also redistribute dividends. Whoever can achieve these two goals will have the opportunity to define the next generation of the DeFi perpetual contract market.

Source: AZEx Community

1. Historical Review: What Exactly Happened?

In the early hours of August 26, XPL experienced a few minutes of a "rollercoaster" on Hyperliquid:

05:36 A large buy order swept the order book, with the transaction size ranging from tens of thousands to hundreds of thousands of dollars, rapidly pushing up the XPL price.

05:36–05:55 The mark price, dominated by internal matching, surged far beyond the CEX external reference, causing a significant number of short positions to fall below the maintenance margin. The system initiated liquidation: liquidation orders directly hit the order book, forming a "book sweep → liquidation → book sweep again" positive feedback loop, continuously driving up the XPL price.

05:55 The price skyrocketed to a peak, with an almost +200% surge in just a few minutes, while whale accounts completed profit-taking, making profits of over $16 million in a single minute. Some short accounts were liquidated of millions of dollars within minutes.

05:56 The market depth recovered, and the price quickly plummeted, returning the XPL futures market to "normalcy," but a batch of short accounts had already lost everything. Almost simultaneously, the ETH perpetual price on the Lighter platform also experienced a flash crash, briefly dropping to $5,100.

This indicates that this was not an issue limited to a single platform but a concentrated exposure of structural risks in the entire DeFi perpetual contract system.

2. What Were the Consequences of These Situations?

Whales made massive profits, shorts suffered heavy losses. Even low-leverage hedgers were affected.

Many people believed that 1x leverage hedging equated to "risk-free." However, in this event, even a 1x leverage short with ample collateral was liquidated in the flash crash, resulting in losses of millions of dollars. This led many users to the conclusion of "avoiding such isolated markets" in the future. However, the reality is far more complex than this.

3. Core Issue: Structural Flaw of the Order Book Model

Following the XPL event, much of the discussion focused on "single oracle dependency" or "lack of position limits." However, these did not address the core issue.

The Perp protocol itself has various implementation paths:

Orderbook (Order Book Driven)

Peer-to-Pool (Pool-to-Pool)

As well as the hybrid form of AMM

Today's issue lies with the order book-based implementation. Its structural flaws are as follows:

Effective Depth vs. Chip Distribution

1. The order book may appear deep, but the actual effective depth it can withstand depends on the chip distribution.

2. When chips are concentrated in the hands of a few large holders, even a slight price movement can trigger a chain reaction.

Price Anchoring Relies on On-chain Trades

1. In a weak market, on-chain trades directly dictate the mark price.

2. Even with an oracle, as long as the external spot anchor point is not strong enough, this reliance remains a weak spot.

Settlement and Order Book Create Positive Feedback Loop

1. Settlements need to enter the order book → further drive prices → trigger more settlements.

2. In a thinly traded market, this is not an accidental event but an "inevitable stampede."

As for measures like "setting position limits per user," they are essentially meaningless. Because positions can easily be split across multiple sub-accounts or wallets, market-level risks still persist. Therefore, front-running is not the villain's manipulation but rather the destiny of the order book mechanism under low liquidity conditions.

4. Getting Back to Basics: What Is Perpetual Contract Really Solving?

When you say, "I want to go long on ETH," what actually happens behind the scenes?

- In spot trading, you spend 1000U to buy ETH, making a profit if it rises and a loss if it falls.

- In perpetual contracts, you put up 1000U as margin, can open a 10x long position, leverage a position of 10,000U, amplifying gains while also magnifying risks.

Here are two key questions to ask:

Where does the money come from?

Your profits inevitably come from the counterparty (short seller) or the LP-provided liquidity pool.

Who determines the price?

Traditional Markets: Order book trades directly reflect the price, buying more drives the price up. This is the feedback mechanism of the market trend.

On-chain Perpetuals: Most protocols (like GMX) do not have their own matching engine but rely on CEX oracle prices.

5. Issues with Oracle Models

The price of an oracle usually comes from the spot trading on a CEX, which means that on-chain trading volume cannot feed back into the price.

Although oracles have delays, the more fundamental issue is:

You have a position of 100 million U on-chain, and there is no corresponding trading volume in the external spot market.

In other words, on-chain trading demand cannot in turn influence the price, and the risk is "backlogged" in the system.

This is the opposite of the order book model: the order book price feedbacks too quickly, making it susceptible to manipulation; oracle price feedback lags, and the risk is easily delayed in release.

6. Basis and Funding Rate

This brings up another key issue: how to correct the spread (basis) between spot and derivative prices?

In traditional markets, if there are far more long positions than short positions, the derivative price will be higher than the spot price.

Perpetual contracts introduce a funding rate mechanism to adjust:

Too many long positions → positive funding rate, longs pay shorts;

Too many short positions → negative funding rate, shorts pay longs.

In theory, the funding rate can anchor the derivative price to the spot price.

However, in on-chain perpetuals, the situation is more complex: if the spot market depth is insufficient, even with a high funding rate, the spread may not be corrected. Especially for niche assets, on-chain derivatives may deviate from spot prices in the long term, becoming an almost independent "shadow market."

7. The Illusion of On-Chain Liquidity

Many believe that only niche assets are easily manipulated, and marquee assets will not have issues. But the fact is: the real depth of on-chain spot liquidity is far lower than imagined.

Take the top three tokens in each ecosystem:

- On Arbitrum, mainstream tokens other than ETH often have on-chain spot depth within a 0.5% spread range usually only in the single-digit millions of dollars.

- On top DEXs like Uniswap, even for tokens like UNI, the "ecosystem token," its on-chain spot depth is insufficient to support tens of millions of dollars of instantaneous impact.

What does this mean?

Effective depth is often much lower than book depth, especially when chips are concentrated, the actual resilience is even weaker.

In this environment, the threshold for price manipulation is not high. Even the top three tokens in an ecosystem may easily be pushed up or down in extreme market conditions.

In other words, the structural risk of on-chain perpetuals is not a "peculiarity" of the niche market, but the "norm" of the entire ecosystem.

8. Direction of Next-Generation Protocol Design

From this XPL needle-drop event, we can see more clearly that the issue is not a vulnerability of a particular platform, but rather the structural contradiction between the existing order book and on-chain liquidity.

Therefore, when discussing the "new generation of Perp protocols," at least three directions are worth exploring:

1. Preemptive Risk Management: Every opening, swap, liquidity addition/removal, and position adjustment should simulate the post-execution market health beforehand. If the risk exceeds a threshold, it should be proactively restricted or adjusted, rather than waiting for the position to fall below maintenance margin and passively liquidating.

2. Spot Pool Interaction: The current on-chain models either provide feedback too quickly (order book) or with a delay (oracle). A better direction is to establish interaction between the contract position and the spot pool, where during risk accumulation, changes in spot market depth can act as a buffer or dilution. This approach avoids latency congestion and reduces flash crashes.

3. LP Priority Protection: Whether it's an order book or Peer-to-Pool, LPs are the most vulnerable link. The new generation protocol needs to embed LP risk control mechanisms in the protocol layer, making LP risks transparent and controllable, rather than leaving them as the last line of defense.

9. Exploration and Opportunities in Practice

Setting a direction is easy, but implementing it is challenging.

However, some new attempts are already underway:

Preemptive Risk Management: Simulating market health before trade execution to filter risks in advance.

Contract and Spot Pool Interaction: Providing feedback between positions and spot liquidity to avoid risk congestion or flash crashes.

LP Priority Protection: Incorporating LP risk controls into the protocol layer instead of leaving LPs as passive backstops.

At the same time, we cannot ignore a significant market fact:

The perpetual contract market generates over $300 billion in fees and revenue annually. Historically, this revenue was predominantly shared among a few centralized exchanges and professional market makers. If the new generation protocol can integrate AMM technology, breaking down "market-making" into pooled liquidity provision, then more ordinary participants can partake in this market dividend. This is not just an innovation in risk management but also a restructuring of incentive mechanisms.

During these explorations, some new projects have also begun to try different paths. For example, AZEx, based on the Uniswap v4 Hook mechanism, is attempting to combine "pre-execution risk control + dynamic funding rate + market freeze in extreme cases" with "LP pool fee sharing."

Next week, AZEx will launch its Testnet, and interested readers can follow the latest developments at [https://x.com/azex_io].

10. Conclusion

The XPL Needle Insertion Incident reminds us: the risk lies not in the chart but in the protocol.

Today's DeFi perpetual contracts are mostly order book-driven. As long as there is insufficient liquidity and chip concentration, a similar story is bound to replay.

The real competition of the next-generation Perp protocol lies not in UI, points, or commissions, but in: Can we design a new Perp protocol that forms a closed loop of "price discovery, risk control, LP protection," instead of repeatedly reenacting stampedes in extreme market conditions? Can we redistribute the $300 billion market fee share from the hands of a few to more participants?

The next-generation protocol must not only address the risk issue but also reallocate dividends. Whoever can achieve these two points has the opportunity to define the next generation of the DeFi perpetual contract market.