Perpetual futures (perps): what they are and how they work

Perpetual futures (perps): what they are and how they work

The perpetual future, or perp, is the most popular instrument on crypto exchanges. It accounts for most of the turnover, even though such a contract barely exists in traditional finance.

Let's look at how it works, why funding is needed and why perps show up so often in arbitrage trades.

What a perpetual future is

It is a contract on an asset's price with no expiry date. You open a long or short position and hold it as long as you like, as long as you have enough margin.

You do not own the coin itself. You only have an obligation on the price difference, which the exchange recalculates continuously.

How a perpetual future differs from a dated future

A dated future has an expiry date. On that day the contract settles at the price of the underlying asset, and the gap between them disappears on its own.

A perp has no such date, so it needs another way to stay close to spot. That way is funding.

How funding works on perpetual futures

Funding is a periodic payment between longs and shorts. The exchange itself receives nothing; the money moves from one side of the market to the other.

If the perp trades above spot, the rate is positive and longs pay shorts. Holding a long gets more expensive, some buyers close out, and the perp price drifts toward spot.

With a negative rate, it works the other way around. Shorts pay longs, and that pushes the perp price up.

A textbook example with hypothetical numbers. The position is 10,000 USDT, and the funding rate is 0.01% per eight-hour period.

• Payment per period: 10,000 × 0.0001 = 1 USDT.
• With this schedule there are three periods per day, so 3 USDT per day.
• With a positive rate, the long pays this amount and the short receives it.

Schedules and formulas differ between exchanges: some settle every eight hours, others more often. Check the terms on the specific venue before trading.

What mark price and index price are

The index price is the average price of an asset across several spot exchanges. It serves as an external reference.

The mark price is the fair price of the contract, which the exchange calculates based on the index. It is used to calculate unrealized PnL and to decide whether a position should be liquidated.

The last trade in the order book can jump sharply in a thin market. The mark price smooths out such spikes, which is why a liquidation usually is not triggered by a single random order.

How margin and leverage work on perps

A position requires collateral, called margin. Leverage shows how many times larger the position is than the collateral.

For example, with 1,000 USDT of margin and 5x leverage, the position will be 5,000 USDT. The higher the leverage, the smaller the adverse price move that leads to liquidation.

In our view, leverage on perps is a tool for saving collateral, not a profit accelerator. Losses grow at exactly the same rate.

How perps are used in arbitrage

The classic trade is buying a coin on spot and shorting the same amount on a perp. Price risk cancels out, and the result comes from funding and the price gap.

From what we see, funding rates on the same coin differ noticeably from exchange to exchange. That is why the second popular setup is to go long the perp where the rate is lower and short where it is higher.

Both setups have pitfalls: entry and exit fees, slippage, the rate flipping sign and the risk of one leg being liquidated. We believe that calculating a trade without these items means calculating it wrong.

Funding on perps across exchanges is easy to compare in the ArbitrageScanner futures screener, where rates are collected in a single window.

Our tools

Funding on the same coin differs from exchange to exchange, and a spot + perp trade only makes sense when you can see the rates of all venues at once. Our arbitrage screener keeps dozens of venues in one window, refreshes quotes every second and shows each gap together with the volume actually behind it. The spread calculator helps you check what survives fees, network costs and slippage at your size. The bot is fully manual. It never connects to your exchange API keys.

To test the tools on a live market, ArbitrageScanner offers one day of free access to the whole ecosystem.

FAQ (Frequently Asked Questions)

1. What is a perpetual future in simple terms?

It is a contract on the price of a cryptocurrency with no expiry date. You make or lose money on price changes without owning the coin itself, and you can hold the position as long as you like while you have enough margin.

2. How does a perpetual differ from a regular future?

A regular (dated) future has an expiry date on which its price converges with spot. A perpetual has no such date, and its price is pulled toward spot by the funding mechanism.

3. Who pays funding on perpetual futures?

With a positive rate, longs pay shorts; with a negative rate, shorts pay longs. The exchange does not take part in these payments; the money moves between traders.

4. How often is funding charged?

It depends on the exchange and the contract. Settlement is often every eight hours, but some intervals are shorter, so check the schedule on the venue.

5. What is the mark price on futures?

It is the fair price of the contract, which the exchange calculates based on the spot index price. Unrealized PnL and the liquidation level are calculated using the mark price.

6. Can you earn funding without risk?

A spot + perp trade removes price risk, but not all risks. Fees, slippage, the rate flipping sign and possible liquidation of the short during a sharp rally remain.

Conclusion

A perpetual future is a contract with no expiry that stays close to the spot price thanks to funding. The mark price protects against random liquidations, and leverage saves collateral but increases risk to the same degree.

For an arbitrage trader, perps are interesting mainly for funding and the rate differences between exchanges. Before opening a trade, calculate all costs and check how much margin buffer each leg needs.

IMPORTANT! We are software developers. We do not give recommendations or promises of earnings and we do not advise you to invest your money anywhere. Our software is fully manual, all your money stays under your own control. We show examples of how our clients have earned on arbitrage in the past, but we do not advise repeating those actions one to one. Your earnings depend solely on your own actions and on market factors.