Perpetual Swap
A perpetual swap is a type of derivative that allows traders to speculate on the future price of an asset without owning it, with no expiry date.
A perpetual swap is a type of synthetic derivative contract that allows traders to speculate on the future price movements of an underlying asset, such as cryptocurrencies, commodities, or fiat currencies, without the contract having a predetermined expiry date. Unlike traditional futures contracts, which settle on a specific date, perpetual swaps can be held indefinitely as long as the trader meets margin requirements. The price of a perpetual swap is typically anchored to the spot price of the underlying asset through a funding rate mechanism. This funding rate is a periodic payment exchanged between long (buyers) and short (sellers) positions. If the perpetual swap price trades above the spot price, longs pay shorts; if it trades below, shorts pay longs. This mechanism incentivizes traders to keep the swap's price closely aligned with the spot market. Perpetual swaps are primarily traded on cryptocurrency exchanges and offer high leverage, enabling traders to control a large position with a relatively small amount of capital. However, this leverage also magnifies potential losses, making them high-risk instruments. Key components include the underlying asset, contract multiplier, initial margin, maintenance margin, liquidation price, and the funding rate.
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Center["Perpetual Swap"]:::main
Pre_cryptography["cryptography"]:::pre --> Center
click Pre_cryptography "/terms/cryptography"
Rel_impermanent_loss["impermanent-loss"]:::related -.-> Center
click Rel_impermanent_loss "/terms/impermanent-loss"
Rel_trading["trading"]:::related -.-> Center
click Rel_trading "/terms/trading"
Rel_synthetic_asset["synthetic-asset"]:::related -.-> Center
click Rel_synthetic_asset "/terms/synthetic-asset"
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🧒 Explain Like I'm 5
It's like a bet on the price of something, but the bet never ends, and you pay or get paid a little [bit](/en/terms/bit) every day to make sure the bet stays close to the real price.
🤓 Expert Deep Dive
Perpetual swaps are a cornerstone of modern digital asset derivatives markets, enabling continuous exposure without the roll-over costs and complexities associated with traditional futures. The core innovation lies in the funding rate, which acts as a continuous market-making incentive. Mathematically, the funding rate ($f$) is often calculated based on the difference between the perpetual swap index price ($I$) and the mark price ($M$), plus an interest rate differential ($r$). A common formula is $f = (M - I) + r$. When $M > I$, longs pay shorts, pushing $M$ down towards $I$. When $M < I$, shorts pay longs, pushing $M$ up towards $I$. This mechanism ensures price convergence, but it can lead to significant costs for traders holding positions during periods of high funding rates. Liquidation occurs when a trader's margin falls below the maintenance margin requirement, triggered by adverse price movements amplified by leverage. The design of funding rate calculation, interval, and liquidation engines are critical for market stability and preventing cascading liquidations, especially during extreme volatility.