Introduction to Perps
Allows speculation on the price of an underlying asset without actual ownership of the underlying
Perpetual futures are non-expiry future contracts. Perpetual futures trade similarly to a margin-based spot market but without any interest costs that come with margin trading.
The price of perpetual futures often diverges from the spot market and signals traders' sentiment on the exchange. If traders expect the underlying asset prices to increase over time, the perpetual futures will likely trade at a premium to the spot on the exchange. Likewise, if traders expect underlying asset prices to decrease over time, perpetual will most likely, trade at a discount to the spot on the exchange.
To keep the prices closer to the underlying reference index price, a funding mechanism is used to incentivize traders.
Funding Mechanism
Every hour, traders with open long or short positions will pay each other a funding payment, depending on market conditions. If the contract price is above the spot price, longs will pay shorts. If the contract price is below the spot price, shorts will pay longs. This incentivizes traders to take the unpopular side of the market.
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