Understanding Perpetual Swaps: The Most Traded Financial Product in Crypto

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. To comprehend perps, it's essential to understand their origins. In traditional finance, leveraged exposure is typically achieved through futures contracts, which have an expiration date. However, this approach created issues in the crypto space, such as basis and contract expirations. BitMEX addressed these problems by introducing perpetual swaps, which have no expiration date and track asset prices indefinitely. The exchange solved the structural challenge of perpetual swaps by implementing a funding rate mechanism, where traders on opposite sides of the market exchange payments every eight hours. This mechanism has become the industry standard. Perpetual swaps also offer leverage, allowing traders to control larger positions with lower capital. To manage risk, exchanges use automated liquidation systems, which close positions before they can go negative. Perpetual swaps have become the primary venue for price discovery in crypto, with regulators exploring their application to traditional assets.