What is a perp?

Perpetual futures are a type of derivative contract that enables traders to speculate on the price of an asset without needing to buy or own the underlying asset itself.

Unlike traditional futures contracts, perpetual futures don’t have an expiration date, meaning traders can hold their positions indefinitely, as long as they maintain the required margin.

How Do Perpetual Futures Work?

Perpetual futures are designed to mirror the underlying reference price of an asset.

To keep perp prices closely aligned with the reference price, perpetual futures use a funding rate mechanism – a unique feature that sets them apart from traditional futures.

The funding rate is a small periodic payment that traders on one side of the contract (long or short) pay to the traders on the other side. This rate incentivizes traders to balance demand, ensuring that perpetual futures prices don’t deviate significantly from the asset’s underlying reference price.

• Positive funding rate: When perpetual futures are priced higher than the spot price (indicating more demand for long positions), traders holding long positions pay a funding fee to those with short positions.

• Negative funding rate: When perpetual futures are priced lower than the spot price, traders holding short positions pay the funding fee to those with long positions.

The funding rate fluctuates based on market conditions, helping perpetual futures stay as close to the asset’s underlying reference price as possible.