Uncovering Perps: The Most Traded Financial Instrument in Crypto

Perpetual swaps, also known as perps, have revolutionized the crypto market with their unique mechanism, allowing traders to maintain leveraged exposure to asset prices without owning the underlying asset. To comprehend perps, it's essential to understand their origins. Traditional finance typically offers leveraged exposure through futures contracts, which expire on a specific date. However, this approach created issues in crypto's early days, with futures trading at a premium to spot prices and contracts expiring, forcing traders to roll over their positions. BitMEX addressed this by introducing perpetual swaps, which eliminated expiry dates and enabled traders to hold positions indefinitely. A mechanism was developed to keep the contract price in check, where payments are exchanged between traders every eight hours, based on the deviation from spot prices. This self-correcting equilibrium has become an industry standard. Perps also offer leverage, allowing traders to control larger positions with lower capital, but this comes with risks, managed by automated liquidation systems. Today, perps are the primary venue for price discovery in crypto, with regulators exploring their application to traditional assets, potentially transforming the financial landscape.