Understanding Perpetual Swaps: The Hottest Trading Instrument in Crypto

Perpetual swaps, also known as perps, have revolutionized the crypto trading landscape by providing a unique derivative contract that tracks the price of an asset indefinitely. Unlike traditional futures contracts, which expire on a specific date, perps eliminate the need for expiration dates and settlements. This innovation, developed by Ben Delo and launched on BitMEX in 2016, resolved the issues associated with traditional futures contracts, such as basis and expiry-related problems. The perpetual swap mechanism involves a funding rate, which is exchanged between traders every eight hours, and is calculated based on the deviation of the perpetual swap price from the spot price. This self-correcting mechanism ensures that the price of the perpetual swap remains aligned with the spot price. Additionally, perpetual swaps offer high leverage, allowing traders to control large positions with relatively small amounts of capital. However, this also increases the risk of significant losses, which is managed through automated liquidation systems. Today, perpetual swaps have become the primary venue for price discovery in crypto, with regulators exploring their application to traditional assets. The structure of perpetual swaps has proven durable and has become one of the most widely traded financial products globally.