How Does a DAO Use ‘Perpetual Swaps’ for Hedging or Speculation?
Perpetual swaps are derivatives similar to futures contracts but without an expiry date. For hedging, a DAO can short a perpetual swap on an asset it holds to lock in a price and offset potential losses.
For speculation, it can use leverage to take long or short positions. The 'funding rate' mechanism, which periodically exchanges payments between long and short positions, keeps the swap price close to the spot price.
Glossar
Perpetual Swaps
Derivatives ⎊ Perpetual swaps represent a class of financial derivatives, specifically within the cryptocurrency ecosystem, that replicate the payoff of a futures contract without a fixed expiration date.
Liquidation Risk
Exposure ⎊ Liquidation risk, within cryptocurrency derivatives and options trading, represents the potential for forced asset sales due to margin calls triggered by adverse price movements.
Perpetual Swap
Mechanism ⎊ Perpetual swaps, within cryptocurrency markets, represent agreements to exchange cash flows based on the difference between a cryptocurrency’s current price and a user-defined price, perpetually, without an expiration date.