How Do Perpetual Futures Contracts Differ from Traditional Futures Contracts in the Context of Decentralized Finance?
Perpetual futures contracts, or "perps," differ from traditional futures primarily by lacking an expiration date. This allows positions to be held indefinitely.
To keep the perp price aligned with the underlying spot price, they employ a "funding rate" mechanism ⎊ periodic payments between long and short traders. Traditional futures have a fixed settlement date and typically settle via physical delivery or cash, while perps are a crypto-native derivative settled purely in cryptocurrency.
Glossar
Traditional Futures Contracts
Mechanism ⎊ Traditional futures contracts, within cryptocurrency and broader financial derivatives, represent standardized agreements obligating parties to transact an asset at a predetermined price on a specified future date; these instruments facilitate price discovery and risk transfer, differing from spot markets through their deferred settlement.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Inverse Perpetual Swaps
Instrument ⎊ Inverse Perpetual Swaps are derivative contracts where the payoff is inversely related to the price of the underlying asset, often used to hedge long exposure or express a bearish view without directly shorting the asset itself.
Traditional Futures
Derivation ⎊ Traditional Futures, within cryptocurrency and financial derivatives, represent standardized contracts obligating the holder to buy or sell an underlying asset at a predetermined price on a specified future date, differing from perpetual contracts through explicit expiry.
Perpetual Futures Contracts
Open-Ended Contract ⎊ Perpetual Futures Contracts are derivative instruments that track the price of an underlying asset without a set expiration date, allowing traders to maintain leveraged positions indefinitely, provided margin requirements are met.
Funding Rate Mechanism
Mechanism ⎊ Funding Rate Mechanisms within cryptocurrency derivatives represent periodic payments exchanged between traders holding opposing positions in perpetual contracts, designed to anchor the perpetual contract price to the underlying spot market.