Core Concepts & Definitions 📘

2.1 Perpetual Futures Contracts

A Perpetual Futures Contract is a derivative instrument providing continuous exposure to an underlying asset without a fixed expiry. Unlike traditional futures, perpetuals do not settle on a predetermined date, allowing positions to remain open indefinitely. HFDX's implementation of perpetuals is cash-settled and fully collateralized on-chain, ensuring that all obligations are met deterministically.

Key operational mechanics include:

1. Leverage — Traders post collateral while borrowing notional exposure from the protocol's unified liquidity pool. This allows efficient use of capital while maintaining systemic solvency.

2. Funding Rate — A periodic transfer between long and short positions ensures the perpetual price aligns with an external reference (spot index). Funding rates are continuously computed on-chain to prevent price drift.

3. On-Chain PnL Settlement — Profit and loss are marked-to-market in real-time using oracle prices, enforced directly by smart contracts. This eliminates counterparty credit risk and ensures transparent, deterministic outcomes.

4. No Expiry — Positions persist until either voluntarily closed by the trader or force-liquidated due to insufficient margin.

Mathematical Representation:

$$\text{Notional Exposure} = \text{Collateral} \times \text{Leverage}$$

This fundamental relationship ensures that the maximum exposure of a trader is always proportional to the collateral committed and the leverage chosen.

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2.2 Non-Custodial Architecture

HFDX is designed with strict non-custodial principles, meaning:

• Users retain full ownership of assets through externally owned accounts (EOAs) or smart wallets.

• Smart contracts execute only within explicitly defined boundaries, preventing unauthorized access to funds.

• No operator, DAO, or governance body can seize or freeze user assets.

This design reduces counterparty risk, eliminates rehypothecation possibilities, and ensures maximum transparency and security. By restricting trust to the underlying code, HFDX allows both retail and institutional participants to engage without exposure to centralized failures.

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2.3 Unified Liquidity Pool

The Liquidity Pool is the backbone of HFDX, serving as both capital provider and risk absorber.

• It backs leveraged positions by lending liquidity to traders in proportion to their margin.

• It absorbs trading PnL, ensuring that all gains and losses are settled without external intervention.

• It generates yield for liquidity providers and structured instruments like LLNs.

Unified vs Isolated Pools: Traditional DEX derivatives platforms often fragment liquidity across individual markets, leading to inefficient capital deployment. HFDX unifies liquidity, enabling:

1. Higher capital efficiency — idle liquidity in one market can support risk in another.

2. Conservative margining — dynamic allocation ensures solvency while optimizing leverage.

3. Predictable yield mechanisms — LPs and LLNs benefit from aggregated trading activity rather than single-market exposure.

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2.4 Liquidity Loan Notes (LLNs)

Liquidity Loan Notes are structured instruments designed for deterministic yield generation. They convert variable revenue streams—trading fees, funding payments, borrowing interest—into fixed returns over a defined term.

Key characteristics:

• Non-transferable and locked for a predefined maturity period

• Fully on-chain and auditable

• Targeted for institutional treasuries or entities requiring fixed, predictable returns

LLNs allow institutions to engage with HFDX without exposure to the variable PnL of liquidity provision, offering predictable, contractually enforced yield.