For years, Ethereum has been at the forefront of decentralized finance, pioneering on-chain financial tools like lending protocols and tokenized assets. However, the rapidly expanding sector of perpetual futures, or 'perps,' has largely flourished on other platforms.
Traders often associate on-chain perpetuals with Hyperliquid or Solana rather than Ethereum, primarily due to the latter's base layer not being optimized for extremely fast, low-cost, and high-frequency trading. According to AJ Warner, chief strategy officer at Offchain Labs, the main developer firm behind the layer-2 Arbitrum, 'Perps require frequent transactions, fast execution, and deep liquidity, making them a natural use case for the Arbitrum platform.' The distinction has become increasingly important as decentralized perpetual exchanges mature and attract institutional attention. Ethereum's security-first architecture has made it an ideal settlement layer, but its block times and gas costs have historically made it an expensive platform for running latency-sensitive trading applications. When GMX, a decentralized perps exchange, launched on Arbitrum in 2021, it established a template that many others would follow, with Warner noting that 'Ethereum mainnet fees were prohibitively expensive, which naturally attracted perps builders to Arbitrum.' Offchain Labs then prioritized perpetuals as a strategic category, attracting a concentration of builders and capital to the ecosystem.
Today, much of Ethereum's perpetual trading activity takes place not on the Ethereum mainnet but on layer-2 networks like Arbitrum and Base. Ethereum's layer-2 ecosystem has become a compromise, preserving Ethereum's security while dramatically improving trading performance.
Chris Boulous of Dromos Labs argues that technical performance is only part of the story, saying 'Trading is effectively a network-effects business. You have to build where the liquidity and users currently exist.' This dynamic has become self-reinforcing, with protocols launching where traders already are, liquidity providers following the traders, and new applications building around existing liquidity.
Boulous sees Aerodrome, a decentralized exchange on the Base network, as complementary to perpetual exchanges rather than competitive with them, noting that 'You can kind of think of perps as a customer of spot exchanges.' Solana and Hyperliquid have also surged in the perpetual futures market, with Hyperliquid building an application-specific chain optimized for perpetual trading and Solana combining low fees with a large base of retail traders. According to Brian Smith of the Jito Foundation, the user base matters as much as the technology, saying 'The most important ingredient for any exchange platform, but especially perps, is retail organic flow. Solana is the king of retail trading activity.' Smith also argues that Ethereum faces an additional challenge: fragmentation. 'You need to be able to trade everything in a single spot,' he said.
'What Ethereum is suffering from is a level of fragmentation.' Ethereum's scaling strategy has relied on layer-2 networks to handle high-volume activity, reducing costs and improving performance but also dispersing users and liquidity across multiple ecosystems. Not everyone sees this fragmentation as a fatal flaw, however. Some Ethereum proponents argue that the focus on execution misses the network's longer-term role in the on-chain financial stack.
Matthieu Saint Olive, a staff product manager at MetaMask, argues that purpose-built trading chains may ultimately win on execution speed but still require somewhere to source collateral, liquidity, stablecoins, and settlement. 'Ethereum's role is the settlement and collateral base where the deepest liquidity, the widest range of assets, the stablecoins, and the most mature DeFi primitives live,' he said.
As institutions begin paying closer attention to on-chain derivatives, the conversation is shifting from whether decentralized perpetuals can work to whether they can compete with traditional infrastructure. 'It comes down to execution, custody, and predictability, not ideology,' Saint Olive said. Institutions still need deeper liquidity, more efficient capital usage, and better execution before deploying significant trading volume on-chain. The next milestone, according to Boulous, is straightforward: 'You have to be able to do things on-chain that you can't do, or can't do as cheaply, in traditional markets.' While much of today's decentralized perpetual volume revolves around crypto assets, market participants increasingly see the infrastructure supporting perps as the foundation for broader capital markets.
Saint Olive believes perpetuals are already demonstrating what programmable markets can become. 'Perps are the leading indicator, the first place you can watch traditional financial activity genuinely migrate on-chain,' he said.
Whether Ethereum can solve the challenges its critics point to – fragmented liquidity across layer 2s, better interoperability between networks, and a smoother user experience – will determine its role in the market.