Author: Castle Labs

Translated by: Deep Tide TechFlow

Deep Tide Introduction: The trading volume of RWA perpetual contracts increased 120 times within a year, but the uncertainty in funding rates and liquidity cold starts have remained significant issues. Variational's newly launched swap product is directly connected to traditional financial market makers, turning unpredictable funding rates into annualized holding costs, which could be a watershed event for institutions and market makers looking to enter on-chain RWA trading in compliance.

Perpetual contracts have become one of the most powerful tools in digital asset trading. They are capital efficient, allowing users to gain price exposure without holding the underlying assets.

Initially, perpetual contracts competed in the same arena, focusing on crypto assets and liquidity.

As perpetual contracts expanded to more assets, especially real-world assets, the competitive landscape widened, spawning different strategies for the ever-evolving market.

This category has been expanding into stocks, commodities, indices, foreign exchange, pre-IPO markets, and other asset types that do not naturally fit into crypto-native exchange models.

In fact, there is a significant difference between RWA and crypto-native assets concerning the rollout of perpetual contracts. Launching these markets through conventional order books requires cold-starting liquidity one venue at a time, typically relying on subsidies, incentives, and relationships with external market makers.

Essentially, perpetual contracts for RWAs must find a solution that allows for 24/7 trading outside of traditional trading hours to ensure new markets have sufficient liquidity.

Moreover, perpetual contracts are not an ideal tool for RWA trading. The unpredictability of funding rates is a major pain point for RWA perpetual contracts.

Among the teams attempting to address these issues, Variational has just released its swap product, which supports the growing list of markets without needing to rebuild each market and its liquidity from scratch while providing traders with predictable costs.

Contrary to what the name suggests, this isn't about AMM swaps. Swaps have long existed in traditional finance. For Variational users, swaps are a new way to transact RWA with predictable costs and liquidity directly from traditional finance.

This report first highlights the growth of RWA perpetual contracts and their rising market share, then delves deeper into swaps, comparing them with perpetual contracts and explaining their unique aspects.

Next, we convert this implementation into advantages that users can actually feel by comparing the order execution across different perpetual contract platforms.

RWA Perpetual Contracts: From Niche Category to One-Eighth of On-Chain Perpetual Trading Volume

In less than a year, RWA perpetual contracts have transformed from a niche category into a structurally significant share of crypto trading. By October 2025, the trading volume of this category was less than $1 billion, but by August, the trading volume had surpassed $120 billion, growing 120 times within a few quarters.

Figure: Monthly trading volume of RWA perpetual contracts (October 2025 – September 2026), peaking at $147 billion in July 2026. Source: DefiLlama; Date: September 8, 2026.

The category saw its first inflection point last October when TradeXYZ, as the HIP-3 deployment side, launched on Hyperliquid. It has continued to grow since then, peaking at 20% of on-chain perpetual trading volume in July, with most months averaging about 12%-13%, which means that for every $8 traded in on-chain perpetual contracts, nearly $1 came from RWA. Additionally, over the past few months, since June, it has established a foundational trading volume level of $10 billion.

Figure: Monthly share of RWA perpetual contracts in total on-chain perpetual contract trading volume (October 2025 – September 2026), peaking at 20% in July 2026. Source: DefiLlama; Date: September 8, 2026.

Despite the rapid growth of this category, it is also highly concentrated. As of now, the total open interest in RWA perpetual contracts is $4.9 billion, with the top two protocols, TradeXYZ and Variational, accounting for almost 90% of the open interest, followed by GMTrade, Lighter, Ondo, and others.

Figure: Concentration of open interest in RWA perpetual contracts (Top five platforms + Others), with Trade.xyz accounting for about 75% and Variational about 14.2%. Source: DefiLlama; Date: September 8, 2026.

We expect this category to continue growing, and Variational swaps will be a major contributor. In the next section, we differentiate swaps from perpetual contracts and explain why the former is a superior way to trade RWA on-chain.

Swaps or Perpetual Contracts?

This section defines swaps as a new primitive, highlighting the differences from perpetual contracts as trading tools.

At a core level, both are "linear derivatives," meaning that their payouts are linear functions: changes in the asset's price convert to dollar value generated by the contract.

However, perpetual contracts and swaps differ fundamentally in the assets they track.

The birth of perpetual contracts was to closely track the index prices of the underlying assets. Therefore, they use funding rates to encourage rebalancing and closely follow the index prices of spot assets.

In contrast, swaps are used to "track the total return of an asset over a period."

This is reflected in the differences in funding rates. Compared to traditional perpetual contracts, swaps only incur a fee on the position once daily, collected at the close (5 PM Eastern Time).

While perpetual contract funding rates depend on supply and demand, swap fees are better understood as a holding cost, calculated based on "the actual cost of financing the underlying asset in traditional markets."

For stocks, this means the overnight interest rate of the index currency (for example, SOFR for the US dollar). For foreign exchange, it's the overnight interest rate differential between currencies, adjusted based on the spread. For metals, it's the implicit cost of borrowing or lending dollars overnight.

These rates are closely tied to traditional finance as they are the real financing terms based on market rates that Variational obtains from its traditional financial liquidity partners.

Last but not least, swaps also allow users to receive dividends: long positions receive the dividend amount, while short positions pay dividends.

Initially, swap markets will use isolated margin and have set opening and closing times. Variational expects these markets to gradually achieve 24/7 operation, implementing cross-margining within the platform.

The first swaps launched are US100, US500, XAU, XAG, and USOIL. Since they went live earlier this month, these markets have contributed $3.8 billion in trading volume, with a peak open interest of $245 million.

For Variational, evolving from perpetual contracts to swap was a necessary step, considering that only two months after launching, traditional financial perpetual contracts already accounted for more than 50% of its trading volume and open interest.

Rather than relying on supply and demand relationships and frequent funding costs, Variational focuses on directly accessing traditional financial liquidity, transforming volatile funding rates into annualized, easily predictable holding costs, making it easier for institutional investors to approach RWA.

In summary, both swaps and perpetual contracts can provide exposure to the underlying asset.

Swaps draw liquidity from the traditional financial partner network, replacing funding rates with daily fees that can be compared to a stable holding rate, primarily anchored to the cost of borrowing dollars.

Typically, in the swaps markets that have launched, this results in long positions paying 4%-6% annually, while short positions earn 2%-3% annually.

A crucial reminder before proceeding: swaps do not operate in isolation. To fully understand them, the next section delves into Omni liquidity providers and how they co-function with swaps.

Omni and Swap

Most perpetual contract exchanges need to guide liquidity within their platforms. This works effectively for mainstream assets, but problems emerge once the platform attempts to go live with more assets. Each new market requires market makers, inventory, incentives, risk limits, and enough two-sided demand to support a deep order book.

A major differentiator for Swaps lies in how liquidity is obtained, which is also the reason they can provide better execution.

Variational avoids liquidity shortage issues by executing requests for quotes (RFQ) and integrating the liquidity provider Omni.

The Omni liquidity provider (OLP) is Variational's proprietary integrated market maker.

Figure: How OLP (Omni Liquidity Provider) operates: hedging venues provide inputs to the quoting engine, and OLP acts as the counterparty on Omni. Source: Variational / Castle Labs.

OLP directly interacts with liquidity providers in Variational's RFQ, bringing that liquidity on-chain. Since OLP is the counterparty for all trades on Omni, the initial swap market's open interest cap is set at $10 million (which will be increased quickly thereafter) to give the team time to test the hedging strategies of OLP. OLP utilizes external liquidity from centralized exchanges, decentralized exchanges, and TradFi sources to manage and hedge risks.

Variational aggregates Swap liquidity from TradFi venues, so these tools will initially adhere to traditional market trading hours. As more liquidity venues are aggregated, and as traditional markets continue to evolve towards round-the-clock trading, 24/7 trading is expected to be realized.

The benefits of this approach are evident: Variational can launch new markets without building an order book from scratch. Instead, they only need price sources, reliable partners in the RFQ system, and OLP's hedging strategy.

This design does not absorb liquidity risk but entails trade-offs in pricing transparency and risk management.

In the next section, we will test whether this is indeed the case by comparing the order execution costs of Variational Swap with other perpetual contract exchanges.

Swap significantly reduces execution costs on Variational, with the costs of TradFi perpetual contracts being 8 to 12 times lower than the most liquid on-chain venues.

If you've been following our research, you should know this is the aspect of most concern for anyone trading RWA. While RWA has numerous advantages, including transparency, global accessibility, and execution efficiency, the ultimate goal is whether these on-chain assets can match or even surpass the execution level of their TradFi counterparts.

Comparative Analysis of Swap and Perpetual Execution Costs

Perpetuals are better suited for 24/7 crypto-style markets, with funding rates dictated by supply and demand from exchanges. In contrast, Swaps are better suited for traditional assets, as funding costs, dividends, and external liquidity are more critical.

The strongest claim about Variational Swap is not only that it offers more markets but also that it can provide better execution.

To quantify this carefully, we compare the execution costs of Variational Swap with major on-chain venues for TradFi perpetual contracts. Our platform sample includes major on-chain perpetual contract trading venues like TradeXYZ, Lighter, and Ostium.

Methodology

In our market sample, we analyzed and compared US100, US500, XAU, and XAG markets, as well as their corresponding products on other exchanges. Due to differences in how venues execute orders, the measurement of execution costs varies.

For order-book-based venues like TradeXYZ and Lighter, we retrieve real-time order books, sort them, and iterate through them to reflect the state of market orders on the order book. For quote-based venues like Variational and Ostium, we analyze published quotes at different scales.

We measure execution costs by taking the average of the costs of long and short position directions. This allows us to better understand the actual state of quotes and the order book.

Analysis

Some venues (like Lighter and Variational) do not charge any trading fees, so their execution costs are solely derived from the spread. Other platforms do charge fees, which increases execution costs.

The first market we analyzed is US100.

Figure: Cost of market orders on US100 index at different trade sizes (basis points). Source: Order books and quotes from each venue, US stock market period on September 7, 2026; Castle Labs.

For smaller scales like $1,000 and $10,000, Lighter is the cheapest venue, charging 0.18 basis points, but its execution costs rise rapidly, climbing from 0.36 basis points at $100,000 to over 9.94 basis points for $1 million trades. Due to the fee structure, Ostium and TradeXYZ are the most expensive venues for small-scale trades, with fees of 5.32 and 4.67 basis points, respectively.

In contrast, Variational Swap's costs rise slowly, from 0.26 basis points for $1,000 trades to 0.47 basis points for $1 million trades, making it 12 times cheaper than TradeXYZ (5.74 basis points) and nearly 21 times cheaper than Lighter (9.94 basis points).

Similar trends were observed in other markets, such as US500.

Figure: Cost of market orders on US500 index at different trade sizes (basis points). Source: Order books and quotes from each venue, US stock market period on September 7, 2026; Castle Labs.

In this specific case, Variational is the cheapest venue at every scale, including $1,000 and $10,000 (0.415 basis points, compared to Lighter's 0.433 basis points).

The gap between the two platforms is small at smaller scales, expanding to 5 times for $1 million trades. This indicates a significant cost difference: $79 vs. $395 in execution costs. TradeXYZ and Ostium charge 5.84 and 4.60 basis points, respectively.

Next, we analyze silver (XAG) on various platforms.

Figure: Cost of market orders on silver (XAG) at different trade sizes (basis points). Source: Order books and quotes from each venue, US stock market period on September 7, 2026; Castle Labs.

Variational is the cheapest venue at $1,000 (0.12 basis points) and $10,000 (0.38 basis points), but its execution costs rise at the $100,000 scale, surpassing Lighter, and are higher at larger scales. The cost of a $500,000 order on Variational is 5.14 basis points, while Lighter's is 4.31 basis points, a difference of about 20%. XAG currently has the shallowest depth among the launched Swap markets, lacking the stable quoting patterns characteristic of other markets. We expect these results will extend to other markets as XAG grows.

Next is the gold (XAU) market, where performance mirrors that of the US100 and US500 indices.

Figure: Cost of market orders on gold (XAU) at different trade sizes (basis points). Source: Order books and quotes from each venue, US stock market period on September 7, 2026; Castle Labs.

For smaller orders of $1,000 and $10,000, Lighter is the cheapest alternative, with opening costs of 5 cents and 60 cents, respectively. However, Variational leads in larger scales above $100,000, with costs of only 0.68 basis points, 65% lower than Lighter. Variational also maintains a lead on the maximum $1 million orders, charging 1.66 basis points, far below competitors: Ostium's closest at 4.63 basis points, while TradeXYZ charges 6.54 basis points and Lighter skyrockets to 8.74 basis points. In most markets, Variational is the cheapest venue for larger order sizes, while Lighter leads for smaller order sizes in assets like gold and US100 (such as $1,000 and $10,000).

Figure: Comparison of the cheapest venues across different trading sizes (XAU, XAG, US100, US500). Source: Order books and quotes from each venue, US stock market period on September 7, 2026; Castle Labs.

The on-chain trading landscape continues to evolve.

The share of RWA and TradFi assets in perpetual contract trading volumes is steadily increasing.

While there is strong demand from on-chain native users, the novelty of these assets and the accessibility benefits of being on-chain mean that the market is far from achieving the efficiency needed to attract large-scale institutional traders.

Perpetual contract protocols must constantly balance the need to "launch attractive new assets" and "ensure sufficient liquidity for efficient execution." Furthermore, perpetual contracts are not friendly to RWA traders, as unpredictable funding rates can affect the ultimate profit and loss of a trade.

Variational swaps provide an interesting way to address both of these issues, benefitting both retail and institutional traders.

The former can benefit from predictable funding costs and a clear understanding of the actual costs of holding exposure through swap positions. The latter can rely on low execution costs, predictable funding rates, and close linkage to the underlying market.

The rapid growth of swaps confirms this: they have already contributed over 50% of Variational's daily trading volume, with open interest exceeding $220 million.

This is primarily driven by the US100 market. As of September 7, this market accounted for over 50% of all swap trading volumes and 30% of open interest.

In the first batch of launched markets, funding rates show annual payments for long positions between 4.6% and 5.7%, while short positions yield about 2.4%.

Figure: The first launched markets of Variational Swap (US100, XAU, US500, XAG, USOIL) quotes, 24-hour trading volumes, open interests, and annualized funding rates (long/short). Source: Variational.

So far, executing large-scale trades across most RWA markets and achieving good execution has been challenging. Swaps bypass the need for liquidity initiation, providing TradFi-level depth for any market, effectively redefining perpetual trading venues as an on-chain derivatives protocol—capable of aggregating liquidity where it already exists and transparently settling that exposure.

This model has clear advantages. It can support more markets, avoid slow liquidity initiation issues, and provide users with exposure to assets that are difficult to list on-chain with predictable costs.

By doing so, swaps also create a clearer structure for RWA, where funding costs and trading times reflect the underlying market rather than being driven by the supply-demand dynamics of perpetual contract templates.

The trade-off, however, is that this model places higher demands on OLP. Users do not rely on extensive public order books but instead depend on Variational's pricing, hedging, risk management, and the ability to maintain competitive quotes across hundreds of markets through its RFQ. All of this makes the quality of execution a core aspect that needs to be proven.

Our analysis confirms that for current listed assets across most trade sizes, Variational is the cheapest venue. Taking US100 as an example, the cost of a $1 million trade can be as low as $47. However, in certain cases, such as silver, due to insufficient trading volume, execution costs are higher, with a $1 million trade costing $787, which is 20% more than Lighter.

Since the platform charges no fees, it further reduces execution costs, making it one of the most cost-effective venues for trading TradFi markets on-chain.