What are Perpetual Futures?
Perpetual futures, commonly called perps, are derivative contracts that allow traders to speculate on asset prices without owning the underlying asset. Unlike traditional futures that expire on specific dates, perpetual futures have no expiration and can be held indefinitely. They have become the dominant trading instrument in cryptocurrency markets.
How Perpetual Futures Work
Perps track the price of an underlying asset like BTC or ETH. Traders take long positions betting price will rise or short positions betting price will fall. Positions are typically leveraged, meaning traders control larger notional values than their deposited collateral.
Profit and loss are calculated based on the price difference between entry and current price, multiplied by position size and leverage. Unrealized profit and loss fluctuates with market movements until the position is closed.
The Funding Rate Mechanism
Since perps never expire, a mechanism is needed to keep their price aligned with the underlying spot price. This is the funding rate, a periodic payment exchanged between long and short position holders.
When the perp trades above spot price indicating more demand for longs, longs pay shorts. When the perp trades below spot meaning more shorts, shorts pay longs. This incentive structure keeps the perpetual price anchored to spot.
Funding typically occurs every 8 hours, though some platforms use hourly or continuous funding. Rates can be positive or negative and vary significantly based on market conditions.
Perpetual Futures Platforms
In centralized crypto, Binance, Bybit, and OKX dominate perps trading. In DeFi, major platforms include GMX on Arbitrum and Avalanche, dYdX with its dedicated chain, Hyperliquid on its Layer 1, and various Synthetix-based protocols.
DeFi perps vary in design. Some use liquidity pools as counterparties, others use virtual AMMs, and some implement order books with off-chain matching.
Leverage and Liquidation
Perps allow significant leverage, sometimes up to 100x or more. While leverage amplifies potential gains, it equally amplifies losses. If losses approach the deposited margin, positions are liquidated to prevent negative balances.
Understanding liquidation prices and maintaining adequate margin is crucial for perps trading. High leverage dramatically reduces the price movement needed for liquidation.