What is Perpetuals?
How it works
Perpetual contracts, also known as perpetual futures or perps, are synthetic derivatives that mirror the price of an underlying asset like Bitcoin or Ethereum. Unlike traditional futures, they have no settlement date, allowing positions to be held indefinitely. Traders can go long or short using leverage, which amplifies both gains and losses. To keep the contract price anchored to the spot price, a funding rate is used—longs pay shorts when the contract trades above spot, and vice versa. This periodic payment creates an incentive for arbitrageurs to keep prices aligned. Platforms like dYdX and GMX offer these products on chains such as Ethereum and Arbitrum, using on-chain order books or liquidity pools.
When a trader opens a perpetual position, they must post collateral, typically a stablecoin or the underlying asset. Leverage determines the position size relative to collateral. If the market moves against the position, the trader faces liquidation to prevent losses exceeding collateral. Liquidation thresholds vary by platform, often around 80-90% of the initial margin. The funding rate is calculated based on the difference between the perpetual price and the spot index price, and is paid every few hours or continuously. For example, on dYdX, funding is exchanged every hour. This mechanism ensures that perpetuals behave like futures with rolling positions, but without the administrative overhead of expiry.
Perpetual protocols also incorporate risk management features like insurance funds and liquidation cascades. On GMX, for instance, a glp (liquidity pool) acts as counterparty to all trades, earning fees and funding payments. Liquidations are executed automatically by smart contracts, and the insurance fund covers any deficits. The absence of expiry makes perpetuals ideal for short-term speculation and hedging, but introduces unique risks like funding rate exposure and extreme leverage. Advanced platforms like Synthetix use a debt pool model, while dYdX relies on an off-chain order book with on-chain settlement. These design choices affect liquidity, slippage, and user experience.
Why it matters
Perpetuals have become a cornerstone of crypto derivatives, offering traders continuous exposure without rollover costs. They provide deep liquidity, high leverage, and efficient price discovery, rivaling traditional centralized futures. For DeFi, they unlock permissionless access to sophisticated trading instruments, attracting both retail and institutional users. By enabling shorting and hedging without borrowing the underlying asset, perpetuals enhance capital efficiency and market completeness, contributing to the maturation of decentralized finance.
Real-world examples
Real-world protocols offering perpetuals include dYdX (running on StarkEx then its own Cosmos chain), GMX (on Arbitrum and Avalanche), Perpetual Protocol (on Optimism), and Synthetix (on Ethereum). These platforms support assets like BTC, ETH, and AVAX with up to 50x leverage. The first on-chain perpetuals emerged around 2020, and total value locked in perpetual DEXs now exceeds billions in volume daily.
FAQ
How do perpetuals differ from traditional futures?
Perpetuals have no expiration date, so traders can hold positions indefinitely without rolling contracts. They use a funding rate mechanism to anchor the contract price to the spot price, whereas traditional futures expire and are settled at a specific date.
What is a funding rate in perpetuals?
The funding rate is a periodic payment between long and short positions to align the perpetual contract price with the underlying spot price. It is typically calculated from the difference between the perpetual and index prices and paid every few hours.
Are perpetuals available on decentralized exchanges?
Yes, several decentralized exchanges offer perpetuals, including dYdX, GMX, Perpetual Protocol, and Synthetix. These platforms provide permissionless access to leveraged trading without a central counterparty.
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