Perpetual Contracts: Funding Rates, Mark Prices, and Leverage Risks
Summary
The document explains how crypto perpetual contracts differ from dated futures and describes the funding mechanism used to encourage their prices to track spot markets. When a perpetual trades above spot, longs pay shorts; when it trades below spot, shorts pay longs. It also introduces leverage, noting that it magnifies exposure and can increase liquidation risk, and describes mark price as a reference for unrealized profit and loss that can reduce liquidations caused by temporary price spikes.
The article mentions spot-versus-derivatives speculation, hedging, arbitrage, decentralized exchanges, and contracts linked to tokenized real-world assets. However, these topics receive little operational detail, and no evidence is provided for claims about trading volumes or price stability. The leverage example illustrates exposure but does not model fees, funding, margin rules, or liquidation mechanics. Readers should treat the material as an introductory overview rather than a complete guide to pricing or risk management.
Key ideas
- Perpetual contracts have no fixed expiration and use periodic funding payments to encourage alignment with spot prices.
- Funding payments flow from longs to shorts when the contract trades above spot, and in the opposite direction when it trades below spot.
- Leverage can increase both exposure and the risk of liquidation.
- Mark price is used as a reference for unrealized profit and loss and liquidation calculations.
- The document mentions hedging and arbitrage but does not explain detailed execution or risk controls.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.