Prime brokers & Perpetuals Aggregators

It seems like an odd pairing, but perps aggregators may be the prime brokers of crypto. Comparing and contrasting this TradFi concept and applying it to DeFi.

What’s a prime broker (PB): a PB is a brokerage relationship with a client, typically an institutional one, hedge fund, etc.. The client sends trades to the PB, the PB sends them to an exchange, and the client gets their fill. The PB extends leverage to the client, sometimes a lot. Like a lot a lot. The most degenerate man of all time accomplished his positively insane deeds with the help of a PB (Bill Hwang, look him up):


How does the PB work: it maintains relationships with exchanges and keeps sufficient capital handy so it can execute trades for clients. The exchange has rules that the PB must adhere to to maintain that relationship and route orders for their clients. This lets large clients conduct block trades and not worry about logistics of the order.

If you’re the portfolio of WhaleChad Capital Management, you don’t want to concern yourself with the clerical process of your trades. You’ve got enough to worry about with the analysis, risk management, etc that goes into managing a portfolio. PB’s help with this.

So where does the analogy with perps DEX aggregators (PDA) come in? A PDA isn’t like a regular DeFi spot aggregator (1inch, Matcha, etc.). Spot aggregators don’t give you leverage, $100 of one token gets you $100 of another. Once your swap is filled, the transaction is done. A spot DEX aggregator just vets for the best price, sends your order to the DEX, gets you your fill, and that’s it. No collateral or risk management considerations. Much easier.

Perps allow leverage. To be extended margin, you need to have an account on the exchange. You need to deposit collateral. It’s not “place my trade and we’re done” like it is with spot aggregators. You have an open, leveraged position that requires an account. So how can you aggregate this? You may be able to start seeing the PB parallels here with PDAs. A PDA, or DeFi Prime Broker, will have “relationships” with the perps DEX exchanges (like RabbitX). They will have seats at these exchanges. Except these seats are API connections and smart contract functions. A PDA will be a vault you deposit into with connections to perps DEXs. It will then let you place your trade from there and route it to the most optimum exchange.

All you need to do is deposit, then you can send your order to many perps DEXs at once. The PDA will have to abide by the risk management rules of the exchange the order is held at like a user trading directly would. If you want to close a trade and open another, it should be a relatively seamless experience. Closing your BTC long that was filled at dYdX and then opening an ETH short at RabbitX could be done all via one DeFi PB and a couple clicks from the same UI. We can replace a major TradFi business with vaults, essentially.

The behind-the-scenes logistics will be taken care of by the PDA and you will get your order filled based on the best fill, funding rates, or whatever parameters you place when you send it. Personally, I think DeFi prime brokers is better branding than DEX aggregator. These are just reflections on the DeFi perps space and how it may develop. Things we're always thinking about at RabbitX.

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