Perpetual Swaps Explained
Perpetual swaps (perps) are the most popular derivative in crypto, accounting for over $100 billion in daily trading volume. Unlike traditional futures that expire, perps never settle. Traders can hold positions indefinitely.
What Are Perpetual Swaps?
Perpetual swaps are derivative contracts that track an underlying asset's price without expiration. They were invented by BitMEX in 2016 and have become the dominant way to trade crypto with leverage.
Key Features
No Expiration: Hold positions indefinitely, unlike traditional futures. Leverage: Trade with borrowed capital, amplifying gains and losses. Funding Rate: Mechanism keeping perp prices aligned with spot. Long and Short: Profit from both rising and falling prices.How Perpetual Swaps Work
Opening a Position
- Deposit collateral (typically USDC or the traded asset)
- Choose direction: Long or Short
- Set leverage: 1x to 100x+
- Position size = collateral x leverage
Example
Deposit $1,000, open a 10x long ETH position. Effective exposure is $10,000 of ETH. If ETH rises 5%, you profit $500 (50% return). If ETH falls 5%, you lose $500.
Liquidation
If losses approach your collateral, the position is liquidated:
- 10x leverage: ~10% adverse move liquidates
- 100x leverage: ~1% move liquidates
Funding Rate
To keep perp prices aligned with spot:
- Perp above spot: longs pay shorts
- Perp below spot: shorts pay longs
- Payments occur every 8 hours (or continuously)
DeFi Perpetual Protocols
Protocol Types
Order Book DEXs: Traditional matching engine. Examples: dYdX, Vertex. AMM-Based: Liquidity pools as counterparty. Examples: GMX, Gains Network. vAMM Models: Virtual AMMs. Example: Perpetual Protocol.Major Protocols
dYdX: Leading order book perps, now on custom Cosmos chain. GMX: Popular on Arbitrum/Avalanche, uses GLP liquidity pool. Gains Network: Synthetic perps with up to 150x leverage. Hyperliquid: High-performance order book on custom L1.Trading on DeFi Perps
Advantages
- Self-custody until trading
- Transparent, on-chain trades
- Permissionless, no KYC
- Composable with other DeFi
Disadvantages
- Higher fees than CeFi
- Lower liquidity
- Blockchain latency
- Fewer trading pairs
Risk Management
Position Sizing: Never risk more than 1-5% of capital per trade. Stop Losses: Set stops to limit downside. Funding Awareness: Monitor funding for long-term positions. Liquidation Buffer: Maintain extra margin for volatility.Earning Yield from Perps
GMX GLP: Deposit assets, earn trading fees and funded P&L. Gains Network gDAI: Deposit DAI, act as counterparty to traders. Funding Rate Arbitrage: Collect funding by taking opposite side of crowded trades.FAQ
What is the funding rate?A payment between longs and shorts keeping perp prices aligned with spot. Positive = longs pay shorts.
How much can I lose trading perps?Your entire collateral if liquidated. With proper risk management, limit losses to position size.
What leverage should beginners use?Start with 2-5x until you understand mechanics. Experienced traders rarely exceed 10x.
Related Topics
Explore: [funding rate explained](/insights/learn/funding-rate-explained), [options trading in DeFi](/insights/learn/options-trading-defi), [delta neutral explained](/insights/learn/delta-neutral-explained).
Explore perps yields. Fensory tracks LP yields across perpetual protocols.[Explore Perps Yields →](https://www.fensory.com)