Understanding Perps: The Most Traded Financial Instrument in Crypto

Perpetual swaps, or 'perps', are a type of derivative contract that has revolutionized the crypto market, allowing traders to gain leveraged exposure to assets like bitcoin without actually owning them. These contracts have no expiry date and are traded continuously, with their price tracking the underlying asset's value. To maintain price equilibrium, a funding rate is applied every eight hours, where traders on opposite sides of the market exchange payments based on the contract's deviation from the spot price. This mechanism has become an industry standard, used by major derivatives exchanges worldwide. The use of leverage in perpetual swaps allows traders to control larger positions with smaller amounts of capital, but also increases the risk of significant losses. To mitigate this risk, exchanges employ automated liquidation systems to close positions before they become too large. Perpetual swaps have become the primary venue for price discovery in crypto, with regulators now exploring their application to traditional assets.