Understanding Perps: The Crypto Trading Instrument That's Taking the World by Storm

Perpetual swaps, also known as perps, have revolutionized the crypto market by providing a unique trading instrument that offers leveraged exposure to asset prices without the need for ownership. With no expiry date, these contracts have solved the issues associated with traditional futures contracts, such as basis and expiry-related problems. The mechanism behind perps involves a funding rate that is exchanged between traders every eight hours, which helps to maintain a self-correcting equilibrium. This rate is calculated based on the deviation of the perpetual swap price from the spot price, ensuring that the contract price remains aligned with the underlying asset. The use of leverage in perps has also been a key factor in their popularity, allowing traders to control larger positions with minimal capital. However, this leverage also comes with significant risk, which is managed through automated liquidation systems. As the primary venue for price discovery in crypto, perps have proven to be a durable and effective trading instrument, with regulators now exploring their application to traditional assets.