Understanding Perpetual Swaps: The Dominant Force in Crypto Trading

Perpetual swaps, or 'perps', have revolutionized the crypto trading landscape by providing a contract that has no expiry date, allowing traders to hold positions indefinitely. This innovation resolved issues associated with traditional futures contracts, such as basis and expiry dates. The mechanism behind perps involves a funding rate, which is exchanged between traders every eight hours, helping to maintain a self-correcting equilibrium between the contract price and the spot price of the underlying asset. Leverage also plays a crucial role in perps, enabling traders to control larger positions with lower capital, although this comes with significant risk. The use of automated liquidation systems helps manage this risk. Perps have become the primary venue for price discovery in crypto, with regulators now exploring their application to traditional assets.