Perpetual Futures in Crypto

Perps. Most traded crypto derivative by volume. By a significant margin.

Contract on the price of an asset. Not the asset itself. Long ETH perp, you don't own ETH. You own exposure to ETH's price movement.

No expiry. Traditional futures settle on a specific date. Perps run until you close them or get liquidated. Hold for ten seconds or ten months. No rollover required.

Leverage built in. Control more than your actual balance. That's the draw. Also the risk.

How They Differ From Spot

• Spot trading: buy ETH, you have ETH. Price doubles, position doubles. Price halves, position halves. Maximum loss is what you put in. No expiry. No funding.
• Perp trading: buy ETH perp, you have exposure to ETH price. Same upside math with leverage applied. 10x long, price rises 10%, you made 100% on margin. Price drops 10%, margin gone. Liquidated.

Key difference beyond leverage: spot holders own the asset. Perp traders own a contract. If the exchange collapses, spot held in self-custody is safe. Perp position on that exchange is gone.

FTX proved this. Billions in perp positions evaporated when the exchange failed. Spot held off-exchange survived.

The No Expiry Problem

Traditional futures expiry forces price convergence. Contract must settle at spot price on the date. Natural anchor.

Perps have no expiry. Nothing forcing convergence mechanically. Left alone, perp price drifts from spot. Could trade at massive premium during bull euphoria or steep discount during panic.

Funding rate solves this. Periodic payment between longs and shorts every 8 hours. Perp above spot, longs pay shorts. Makes being long expensive, pushes price back down. Perp below spot, shorts pay longs. Pushes price back up.

Elegant solution. Keeps perp price tracking spot without needing a settlement date.

Margin and Liquidation

Open a perp position, need margin. Collateral sitting in the account backing the trade.

Position moves against you. Unrealized loss eats into margin. Gets close enough to zero, exchange liquidates. Closes the position automatically. Margin gone.

Liquidation price calculated before the trade opens. Depends on leverage and margin allocated.

10x long BTC at $60,000. $1,000 margin. Liquidation sits around $54,000. BTC drops 10%. Position closed. $1,000 gone.

Same trade at 2x leverage. $1,000 margin controlling $2,000 position. Liquidation sits around $30,000. Much more room. Much harder to get wiped on a normal move.

Leverage is the amplifier. Works both directions. More leverage, liquidation closer, less room for error.

Mark Price vs Last Price

Liquidations calculated on mark price. Not last traded price.

Last price: most recent transaction on that exchange. Can be manipulated on low liquidity assets. Spike someone's last price briefly to trigger liquidations. Profitable for the manipulator.

Mark price: weighted average of spot price across multiple exchanges plus funding adjustment. Much harder to manipulate. Requires moving the entire spot market not just one exchange's perp.

Protects traders from predatory wicks designed to trigger liquidations. Not perfect but significantly better than using last traded price.

Decentralized Perps

Traditionally perps lived on centralized exchanges. Binance, Bybit, OKX. Counterparty risk. If exchange fails, positions fail.

Hyperliquid changed this. On-chain perpetual futures. Runs on its own Layer 1. Trades execute on-chain. Non-custodial. Exchange can't steal funds because it never holds them.

dYdX another major decentralized perps platform. GMX on Arbitrum. Various others across chains.

Volume on decentralized perps growing but still fraction of centralized. Hyperliquid specifically gained serious traction in 2024. Billions in daily volume on a fully on-chain system.

Trade-off: decentralized perps have different liquidation mechanics, sometimes worse execution, occasionally higher fees. Non-custodial is the feature. Everything else is the cost.

Why Perps Dominate Crypto Derivatives

Volume on BTC perpetuals dwarfs spot trading on most days. Retail and institutional both.

Leverage is obvious draw. Hedge funds use them to manage directional exposure without moving spot markets. Market makers use them to hedge inventory. Retail traders use them to amplify bets.

No expiry simplifies everything. Traditional futures traders deal with rolling positions as contracts expire. Perp traders just hold. One contract. No management unless the position needs adjusting.