Perpetual Swap

A future with no expiry, held to spot by a payment

A perpetual swap tracks the price of an underlying without ever expiring. Nothing settles it, so it needs another mechanism to stop it drifting away from spot: a funding payment exchanged periodically between longs and shorts, whose sign depends on which side the contract is trading. It is the clearest example in modern markets of a contract kept honest by an incentive rather than by a delivery date.

Open in the app · Alternative Underlyings · intermediate

Alternative Underlyings is part of the OTC Learn subscription. Everything the app shipped with — 36 products across six asset classes — stays free.

What the lesson covers

1. What it is
2. The funding rate
3. Mark price and liquidation
4. Why it’s used
5. Risks to watch

Key terms

• Funding rate — The periodic payment between longs and shorts that keeps a perpetual contract close to the underlying index.
• Funding interval — How often that payment is exchanged — commonly every eight hours, which compounds quickly.
• Index price — A composite of external spot sources used as the reference, rather than the venue’s own last trade.
• Mark price — The valuation used for margin and liquidation, built from the index so a single order cannot move it.
• Maintenance margin — The equity level below which a position is closed out by the venue rather than allowed to go negative.
• Insurance fund — A pool absorbing the shortfall when a liquidation cannot be completed at better than the bankruptcy price.

In practice

Perpetuals are the highest-volume derivative in digital asset markets, and the funding rate is watched as a positioning indicator in its own right. The design is now being borrowed elsewhere: the question it answers — how do you anchor a never-settling contract to a reference price — applies to anything continuously traded.

Read next

• Cash and Carry Basis — Buy the asset, sell the future, collect the difference
• Contract for Difference — Cash-settled exposure to a price move
• FX Swap — Exchange currencies now and reverse it later

In the app, Perpetual Swap carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.