Perpetual Swap Mechanics

What Makes a Perp Different

Traditional futures contracts expire on a specific date — after which both sides settle and the contract ceases to exist. Perpetual swaps (perps) have no expiry. They were invented in 2016 by BitMEX and have become by far the most-traded crypto derivative — daily volumes regularly exceed spot markets by 5-10x across centralised and decentralised venues. Because perps never expire, they need a different mechanism to stay tied to the underlying asset's spot price. That mechanism is the funding rate.

The Funding Rate

Every 8 hours (on most venues), traders holding perps pay or receive a funding rate based on whether the perp is trading above or below the spot index. If the perp is trading at a premium (longs are paying more than spot), longs pay shorts a funding fee proportional to position size. If perp is at a discount, shorts pay longs. This incentivises arbitrageurs to push the perp back toward spot. Funding rates are typically 0.01% per 8h in calm markets (~11% APY) and can swing to 0.5%+ per 8h (~500% APY) during squeeze events.

Leverage and Margin

Perps offer leverage — you can control a $10,000 position with $1,000 of collateral at 10x leverage, or $100 at 100x. The collateral is your 'margin'; the position is the notional size. If the price moves against you, your margin gets depleted; when your margin falls below the 'maintenance margin' threshold, the exchange liquidates your position to prevent losses exceeding your collateral. Higher leverage means smaller price moves liquidate you.

• Perps never expire; funding rate keeps them pegged to spot
• Funding paid every 8 hours: longs pay shorts when perp trades above spot, vice versa
• Leverage: control a big position with small collateral
• Liquidated when margin falls below the maintenance threshold