Perpetual Contracts

Perpetual contracts are a popular type of financial derivative in the cryptocurrency space that allow individuals to speculate on the price movement of an asset. They are similar to futures contracts but with a few key differences that make them unique and widely traded.

What is Understanding the Basics?

Perpetual contracts require the use of tokens as collateral to open a leveraged position. This means that individuals can trade with a larger amount of capital than they actually have. If a person predicts that the price of the asset will rise, they can open a long position. On the other hand, if they believe the price will fall, they can open a short position.

When opening a leveraged position, traders must deposit an initial amount of tokens as collateral. The leverage ratio determines the amount of leverage they can use. For example, with a leverage ratio of 10x, traders can trade with ten times the amount of tokens they have deposited.

As the price of the asset moves in the desired direction, traders can profit from the leverage. If the price rises in a long position, they will receive more tokens when closing their position. Conversely, if the price falls in a short position, they will receive more tokens upon closing.

What is the Key Difference: No Expiration Date?

The main distinction between perpetual contracts and traditional futures contracts lies in their expiration. Futures contracts have a predetermined settlement date, which means that traders must close their positions before that date. On the other hand, perpetual contracts have no expiration or settlement date.

This means that individuals can hold a perpetual contract for as long as they desire. They are not bound by any time constraint, and they can close their position whenever they think it is the right time.

What is Maintaining Price Alignment?

Without an expiration date, perpetual contracts need a mechanism to ensure that the contract price aligns with the spot market price of the underlying asset. This is where the concept of funding payments comes into play.

Perpetual contracts include a funding payment to help maintain the price in line with the spot market. If the contract price is higher than the spot price, traders with long positions will pay traders with short positions, and vice versa. These payments occur at regular intervals, typically every 1 or 8 hours.

By having funding payments, perpetual contracts incentivize traders to close the price gap between the contract price and the spot price. This mechanism keeps the contract price closely tied to the actual price of the asset in the spot market.

What is the Rise of Perpetual Contracts in the Cryptocurrency Space?

Perpetual contracts have gained immense popularity in the cryptocurrency space due to their user-friendly nature and flexibility. They have become the most widely traded instrument in the crypto market, with trillions of dollars in trading volume each day.

One of the main reasons for their popularity is the ability to trade with leverage. Leverage allows traders to amplify their potential profits, but it also comes with increased risks. Traders need to carefully manage their positions and risk levels to avoid significant losses.

Perpetual contracts also provide traders with the opportunity to profit from both rising and falling markets. In a traditional spot market, individuals can only profit if the price of the asset increases. However, with perpetual contracts, traders can open short positions and profit from a falling market as well.

Additionally, perpetual contracts offer continuous trading. As there is no expiration date, individuals can trade these contracts 24/7 without any interruption. This allows traders from different time zones to participate in the market at any time.

It is important to note that while perpetual contracts can be highly lucrative, they also carry significant risks. The leveraged nature of these contracts amplifies both gains and losses. Traders must have a solid understanding of risk management strategies and be prepared for potential market volatility.

Who is the author?

Yenwen Feng – Co-Founder at Perpetual Protocol

Yenwen Feng is a cryptocurrency and technology professional with extensive experience as a CEO and co-founder of various startups. He has founded companies such as Decore, Cinch Network, Cubie Messenger, Gamelet, and Willmobile. Since 2019, Yenwen has been the CEO and co-founder of Perpetual Protocol, a decentralized perpetual contract protocol.