Perpetual Futures

01 · Concept — what problem does it solve?

Traders want leveraged, perpetual exposure to a price without ever taking delivery. A perpetual future ("perp") is a futures contract with no expiry — but a futures price with no settlement date would drift away from spot. The fix is the funding rate: a periodic payment between longs and shorts that mechanically tethers the perp's mark price to the underlying index. Perps are the highest-volume instrument in all of crypto, and on-chain venues like Hyperliquid and GMX now rival centralized exchanges.

02 · Mechanics

• Mark vs. index: the perp trades at its mark price; the index is the real spot. Funding closes the gap.
• Funding rate: if mark is above index, longs pay shorts (discouraging longs); if below, shorts pay longs. Paid continuously or every ~8h depending on venue.
• Margin & leverage: post margin, take exposure many times larger; an underwater position is liquidated like any leveraged loan.
• Two on-chain designs: orderbook perps (Hyperliquid — its own L1 matching engine) vs. pool/oracle perps (GMX — traders take the other side of a shared LP vault, priced off an oracle).
• vAMM: earlier designs (Perpetual Protocol) priced perps off a virtual AMM curve with no real reserves — pure price discovery, settled in a vault.

03 · Formulas

// funding rate (premium + interest component)
funding = (mark − index) / index + interest_component

// who pays whom
mark > index → longs pay shorts      mark < index → shorts pay longs

// payment each interval on notional
payment = funding · position_notional

// liquidation (same as leveraged lending)
liquidate when margin_ratio < maintenance_margin

04 · Edge cases & risks

• Funding can dwarf the move — in a crowded long, funding bleeds longs continuously; "right direction, wrong funding" is a real way to lose.
• Liquidation cascades — high leverage means a small adverse move triggers liquidations that move price further, liquidating more. Perps amplify volatility both ways.
• LP is the counterparty (GMX-style) — the liquidity vault is short whatever traders are long; in a strong trend, LPs pay out and oracle-priced entries can be gamed.
• Oracle dependence — pool-based perps liquidate and price off an oracle; a manipulated or laggy feed is an attack surface (several historical perp exploits).
• Funding cuts both ways — it is not only a long's tax. In a downtrend the perp can trade below spot, funding flips negative, and a short — say, one hedging a spot bag — now bleeds, paying longs. Sustained negative funding signals crowded shorts and a hedge that is expensive to carry.