The Basics of Perpetual Futures and Perpetual Protocol
The following paragraphs are taken directly from the Perpetual Protocol docs. If you haven't done so yet, we encourage you to become familiar with them.
Perpetual contracts are a type of futures contract, pioneered in the cryptocurrency space by Bitmex. Perpetual contracts are one of the most popular derivative products in the space.
Perpetual contracts allow traders to speculate on the future price of a given asset by buying (going long) or selling (going short) perpetual futures contracts. Unlike typical futures, perpetuals do not expire and remain effective until the trader closes their position.
The price of perpetual contracts will often diverge from the broader market (aka spot market). These deviations signal sentiment on the exchange - if a majority of traders expect the underlying asset to increase in value over time, the price of the perpetual contract will likely exceed the spot price. Likewise, if most traders expect the price to fall, the price of the perpetual will be below the spot price.
There are two mechanisms that moderate this process, and function to keep the perpetual contract price close to the spot price.
- Funding payments
- Every hour, traders with open long or short positions will pay each other a funding payment, depending on market conditions. If the contract price is above the spot price, longs will pay shorts. If the contract price is below the spot price, shorts will pay longs. The size of the funding payment is a function of the difference between the contract price and the spot price, as well as your position size. This incentivizes traders to take the unpopular side of the market.
- If the contract price diverges significantly from the spot price in other exchanges, arbitrageurs can benefit in two ways. 1. If they hold a position elsewhere, they can use Perpetual Protocol to take the inverse position and earn funding payments. 2. They buy or sell an asset elsewhere, and long or short that asset using Perpetual Protocol, in the expectation that the price will tend to move back toward the spot price.
We highly recommend spending some time learning about perpetual contract trading before starting to use Perpetual Protocol. In general, trading perpetual contracts on our platform is largely similar to trading perpetuals on centralized exchanges. The main differences are:
- Perpetual Protocol does not use an order book - trades are filled right away and there is no need to wait for a counterparty or pay a taker fee.
- Trades settle somewhat slower than on centralized exchanges, especially during high volume - to mitigate this, we provide slippage controls, and all trading operations take place on xDai, which is significantly faster than the Ethereum base layer.
Trading can result in financial loss, although with Perpetual Protocol, you are assured of never losing more than your initial investment. Keep two principles in mind at all times:
- Never invest more than you can afford to lose
- Always do your own research to understand the tokens, wallets and other tools you are using