What is Perpetual Futures?
How it works
Perpetual futures contracts, pioneered by BitMEX in 2016, function similarly to traditional futures but lack a settlement date. Traders can hold positions indefinitely by paying or receiving a periodic funding rate. This rate is exchanged between long and short positions based on the difference between the perpetual contract price and the underlying spot price. When the contract trades above spot, longs pay shorts; when below, shorts pay longs, incentivizing price convergence.
Traders use leverage to amplify exposure, posting initial margin (collateral) to open positions. Exchanges like Binance and dYdX maintain liquidation thresholds: if the margin ratio falls below a maintenance level, the position is liquidated to prevent losses exceeding collateral. On decentralized platforms, smart contracts automate margin calls and liquidations, often using oracles like Chainlink for price feeds. Funding rates are typically paid every 8 hours on centralized exchanges or per block on DeFi protocols.
Key mechanics include mark price (a fair price index to prevent manipulation) and basis (the spread between perpetual and spot). Platforms like Hyperliquid and GMX offer different models: GMX uses a multi-asset pool and dynamic funding, while dYdX uses an order book. The absence of expiry means traders must monitor funding costs, which can be positive or negative, affecting profitability over time.
Why it matters
Perpetual futures dominate crypto derivatives trading, accounting for the majority of exchange volume. They enable efficient price discovery, high liquidity, and flexible speculation without rollover costs. For DeFi, they unlock leveraged exposure in a trustless manner, though they introduce risks like liquidation and funding rate expenses. Their popularity has driven innovation in on-chain derivatives, making them a cornerstone of modern crypto markets.
Real-world examples
BitMEX launched the first perpetual swap for Bitcoin in 2016. Today, Binance offers perpetuals for hundreds of pairs, while dYdX provides a decentralized order-book version (v3 on StarkEx, v4 on its own Cosmos appchain). GMX on Arbitrum and Avalanche uses a liquidity-pool model with dynamic funding. Funding rates on these platforms can spike during volatile events, such as the 2021 Bitcoin crash, causing cascading liquidations.
FAQ
How is the funding rate calculated on perpetual futures?
The funding rate is typically calculated as a combination of a premium (difference between perpetual and spot price) and a fixed interest rate, adjusted periodically (e.g., every 8 hours on Binance or per block on dYdX).
Can perpetual futures be used for hedging?
Yes, traders can short perpetual futures to hedge spot holdings, offsetting downside risk. This is common among miners and long-term holders to lock in prices without selling.
What happens if my position is liquidated on a perpetual futures exchange?
If your margin ratio falls below the maintenance level, the exchange automatically closes your position, and you lose your collateral. Some platforms offer partial liquidation or insurance funds to cover losses.
Related terms
Go deeper
Browse the complete crypto glossary to explore related terms and concepts.
Browse Glossary