Perp DEXs just had one of the... | hitesh.eth OKX Feed

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Perp DEXs just had one of the biggest stress tests in crypto history. Over $19B was liquidated across the market yet one protocol stood unshaken with zero liquidations: @protocol_fx. How did they pull that off? Let’s break down what makes f(x) Protocol so unique 🧵

Over the past few weeks, Perp DEXs have been on fire. According to Blockworks, DEX-to-CEX futures trade volume hit record highs. But the recent market wipeout triggered fear across traders, leading to a massive drop in open interest across top protocols. That event didn’t just shake traders; it exposed fundamental flaws in how most Perp DEXs work, both CLOB and AMM-based.

However, f(x) Protocol is among the few building a completely new approach to fix that. At its core, fxProtocol sits at the intersection of decentralized stablecoins and perpetual trading. Founded by AlladinDAO in 2023, it aims to solve deep-rooted problems like capital inefficiency, funding rate risk, and liquidation cascades.

And it does this through an innovative two-layer architecture evolving from V1 to V2. In V1, fxProtocol introduced a model that splits an asset into two derivatives based on the f(x) invariant: • fAsset: the stable, low-volatility portion • xAsset: the high-volatility, leveraged portion For instance, depositing 1 ETH creates both fETH and xETH, users can choose between both, the balance give the leverage for xAsset. fAsset holders earn yield (e.g., from stETH rewards) while xAsset holders gain leveraged exposure.

To keep the system stable, f(x) Protocol relies on its Stability Pool and a rebalancing mechanism that continuously maintains equilibrium between both sides. V2 builds on the foundation of V1 by introducing structured positions and addressing the exploitable gaps in the earlier design.

This upgrade reframes the system around three core products: ▪ fxUSD → a stablecoin pegged 1:1 to USD ▪ xPOSITION → a token representing a leveraged long (profits when prices rise) ▪ sPOSITION → a token representing a leveraged short (profits when prices fall) Every interaction in V2 revolves around one or more of these assets, depending on your strategy.

If your goal is stability, fxUSD is your go-to asset. It’s partly backed by wsETH (no other LSD), partly by wBTC, allowing it to generate steady yields. But if you want exposure to market volatility, you can open xPOSITIONs or sPOSITIONs to take leveraged long or short positions on supported assets

So, how does this actually work? xPOSITION represents a leveraged long position on a collateral asset such as stETH or wBTC. When you open one, you’re aiming for amplified exposure to the price movement of that asset.

> Collateral Submission The user deposits collateral (stETH or WBTC) to mint fxUSD, the protocol’s stablecoin, which funds the leverage mechanism. > Flash Loan for Collateral The protocol uses flash loans to obtain collateral and create leveraged positions atomically, ensuring full execution without risk of partial failure. > Minting fxUSD For each xPOSITION, the protocol mints fxUSD to maintain collateralization. A 7x position equals 1 unit of xPOSITION backed by 6 units of fxUSD, while the underlying collateral (stETH or WBTC) continues to earn yield. > xPOSITION Creation After securing collateral and minting fxUSD, the leveraged xPOSITION is activated, giving users exposure to the underlying assets.

You start by depositing fxUSD into the protocol which acts as your margin for the short. When you open an sPOSITION, the protocol: - Borrows stETH or wBTC from the long reserve (the same pool that holds collateral for xPOSITIONs). - Sells the borrowed asset on the market (via an integrated AMM or aggregator) in exchange for USDC or fxUSD.

If the price of the borrowed asset (stETH or wBTC) rises and your leverage becomes excessive, the protocol automatically rebalances your position. It repays the borrowed asset using your fxUSD collateral, and any remaining fxUSD (if any) is returned to you. Rather than liquidating you outright, fxProtocol’s rebalancing mechanism ensures your position stays within safe leverage limits protecting both users and the protocol.

To manage these rebalances, fxProtocol relies on its Stability Pool, a backstop system made up primarily of fxUSD and USDC. This pool serves multiple roles: - Peg stabilizer for fxUSD - Rebalancing engine for leveraged positions - Yield generator for liquidity providers

When fxUSD experiences slight depegs, the Stability Pool automatically steps in buying or selling fxUSD to restore the peg while profiting from the arbitrage spread. During leveraged position rebalances, it acts as the first responder, repaying debt and ensuring the protocol remains stable and solvent

So far, fxProtocol has achieved remarkable growth milestones: • 70% growth in Q3 alone • Over $200K in weekly fees since July • More than $100M in stablecoin valuation These numbers highlight a protocol that’s not only functional but rapidly scaling. With a strong foundation, sustainable mechanics, and zero-liquidation design, fxProtocol stands out as one of the most promising innovations in the Perp DEX landscape.

Disclaimer: This educational thread has been created in partnership with PinkBrain.

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