Understanding Perpetual Contracts
Perpetual contracts are a type of derivative that allows easy speculation on the price of an asset.
Similar to futures contracts, they involve using tokens as collateral to open leveraged positions.
If you speculate that the asset’s price will increase, and it does, you will receive more tokens when closing your position.
Conversely, if the price moves in the opposite direction, you will receive fewer tokens upon closing.
Time Dynamics in Trading
The key distinction between futures contracts and perpetual contracts lies in their expiration.
Futures contracts have a predetermined settlement date, whereas perpetual contracts have no expiration or settlement date, enabling holders to maintain their positions indefinitely.
Funding Mechanisms for Spot Market Alignment
In traditional futures contracts, the contract price gradually aligns with the spot market price of the underlying asset as the expiry date approaches.
However, since perpetual contracts lack an expiry date, they incorporate a funding payment mechanism to ensure price alignment with the spot market.
This payment, known as funding, is exchanged between traders. If the contract price exceeds the spot price, long position holders pay short position holders, and vice versa.
These payments occur regularly, typically every 1 hour or 8 hours.
Due to their user-friendly nature and flexibility, perpetual contracts are the most actively traded instrument in cryptocurrency, with trillions of dollars in daily trading volume.