Unpacking Perpetual Swaps: The Crypto Trading Instrument Everyone's Talking About

Perpetual swaps, or 'perps', have revolutionized the crypto market, offering a unique trading instrument that provides 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. The mechanism, developed by Ben Delo, involves a funding rate that ensures the contract price remains aligned with the underlying asset's spot price. This self-correcting equilibrium, combined with the use of leverage, has made perpetual swaps a popular choice among traders. The role of leverage in perpetual swaps allows traders to control larger positions, but also increases the risk of significant losses. To mitigate this risk, exchanges use automated liquidation systems to close positions before they become negative. As the primary venue for price discovery in crypto, perpetual swaps have become a crucial component of the market, with their impact being felt beyond the crypto space, as regulators explore their application to traditional assets.