Perpetual Futures (Perps): What They Are and How They Work

How perpetual futures work

A traditional futures contract has a settlement date; as that date approaches, its price converges on the spot price, and traders who want to keep exposure must "roll" into the next contract. A perpetual contract removes the expiry, so a position can stay open for as long as the trader keeps enough collateral.

Without an expiry to pull the price back, perps use the funding rate instead:

• When the perp trades above the underlying index price, funding is usually positive and longs pay shorts. That makes being long more expensive and pulls the price down toward spot.
• When the perp trades below the index, funding turns negative and shorts pay longs.

Funding is exchanged between traders at fixed intervals, not paid to the exchange.

Positions use margin: the trader posts collateral (initial margin) and can control a position several times larger, which is leverage. If losses bring the collateral below the maintenance margin, the position is liquidated. Exchanges calculate profit, loss and liquidations from a mark price derived from spot index prices, so that a brief spike on one venue does not trigger unfair liquidations.

Some newer venues also list perps on assets with no spot market at all; these compute funding against a moving average of the contract's own mark price rather than an external spot oracle. Related contracts include stock perpetuals and pre-IPO perpetuals.

What perps are used for

• Directional trading with leverage, long or short.
• Hedging: a holder of bitcoin can short a perp to protect against a fall without selling the coins.
• Basis and funding trades: holding spot and shorting the perp to collect positive funding, a strategy that also underpins some synthetic dollars such as Ethena's.
• Market signals: funding rates and open interest are widely watched as gauges of how crowded and leveraged the market is.

Perps trade on centralized exchanges and on on-chain venues such as Hyperliquid.

Two data series are watched closely in perpetual markets: open interest, the total size of contracts that are still open, and the funding rate. Rapidly rising open interest shows new leveraged money entering; funding that stays strongly positive for a long time can signal that the market is crowded into leveraged longs. Because perpetuals carry a large share of crypto price discovery, both are treated as sentiment gauges. Compared with dated futures, which traders must "roll over" into a new expiry, a perpetual can simply be held for as long as the margin allows.

Risks of perpetual futures

• Liquidation: with high leverage, a small price move can wipe out the margin.
• Funding costs: holding a position on the crowded side pays funding at every interval, which adds up over time.
• Cascades: clusters of liquidations can accelerate sharp moves, and exchanges may use insurance funds or auto-deleveraging in extreme cases.
• Venue risk: the collateral sits with the exchange or smart contract.

Perps are complex, high-risk products that are restricted for retail users in some jurisdictions. This is general information, not a recommendation to trade them.

Perpetual vs dated futures vs spot