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Perpetual futures

A perpetual future usually has no scheduled maturity, but its multiplier, price references, funding, margin, liquidation and termination rules are specific to the exact venue and contract.

Updated

For educational purposes only; not investment advice. Perpetual derivatives, leverage and digital assets can cause rapid or total loss.

Direct answer

A perpetual future or perpetual swap is a derivative designed to provide continuing price exposure without a scheduled maturity in its ordinary form. It is not the underlying asset and does not promise indefinite availability: a venue can halt, delist, terminate or cash-close a contract under its rules. Legal product names and clearing arrangements also vary by jurisdiction.

The exact specification controls the economics. Record the underlying and index, quote currency, contract size or multiplier, linear, inverse or quanto payoff, margin and settlement assets, price references, funding rule, fees and lifecycle. A contract count alone does not state coin exposure or notional value.

How it works

A linear contract commonly settles price changes in a quote or collateral currency. With direction s = +1 for long and s = -1 for short, base quantity q, multiplier M, entry fill P_entry and exit fill P_exit, a teaching formula is PnL_linear = s x q x M x (P_exit - P_entry). An inverse contract can instead use a fixed quote-currency face and settle in the base asset; for a long with face Q, PnL_inverse = Q x (1 / P_entry - 1 / P_exit). A quanto contract settles a price exposure in a different asset under a contract-specific multiplier or conversion rule. Never transfer a formula across product types.

Keep the price objects separate. The index or oracle is an external reference; the mark is a venue risk price often used for unrealized P&L and liquidation; the last price is the most recent venue trade; bid and ask fills determine executable entry or exit; a settlement or termination price follows another rule. A stop keyed to the last price may not fire before mark-based liquidation.

Funding is a periodic ledger entry intended to discourage persistent divergence from a reference, not a guarantee that the perpetual equals spot. The payer sign, sampling, interest component, cap, clamp, interval, eligible-position timestamp, price basis and settlement asset are venue-specific. Current or predicted funding is not realized cash; reconcile the finalized account record.

Margin is also a ledger, not leverage alone. Initial margin supports opening exposure; maintenance margin is the continuing risk threshold. Equity can include eligible collateral after haircuts, realized balances, unrealized P&L and settled funding and fees under the venue’s account rules. Isolated, cross and portfolio modes share or offset resources differently, and larger risk tiers can require more maintenance margin. Liquidation price, bankruptcy price and actual liquidation fill are different values. Insurance funds and auto-deleveraging are loss-waterfall controls, not protection of principal.

Use this workflow:

  1. Pin the legal venue, entity, jurisdiction, exact symbol and contract version, including trading, maintenance, delisting, termination, custody and withdrawal rules.
  2. Read the specification: underlying, index, base and quote, linear, inverse or quanto form, multiplier, tick, lot, margin and settlement assets, and fee tier.
  3. Map the index or oracle, mark, last, executable bid and ask, and settlement price to their exact purposes and timestamps.
  4. Convert the intended exposure into signed contracts, notional, native-unit P&L and funding with the product formula; test long, short, positive, negative and rounding cases.
  5. Build an actual-fill ledger for opening and closing P&L, settled funding, maker or taker fees, spread, slippage, borrow, transfers and collateral haircuts.
  6. Stress isolated, cross or portfolio equity, initial and maintenance margin, risk tiers, basis, gaps, oracle faults, collateral depeg, liquidation, insurance and auto-deleveraging.
  7. Reconcile orders, partial fills, positions, funding, fees and balances through reduce-only or voluntary close, liquidation or termination, then verify withdrawable assets and records.

Examples

  • Linear payoff. Long 0.5 BTC at an actual 60,000 USDT fill and exit at 62,000 USDT. Gross P&L is 0.5 x (62,000 - 60,000) = 1,000 USDT; entry notional is 30,000 USDT. At an illustrative 10x, initial margin is 3,000 USDT. Leverage changes required margin and ROI, not the 1,000 USDT gross payoff for this fixed size.
  • Inverse payoff. Long a 10,000 USD BTCUSD inverse face at 50,000 USD/BTC and exit at 55,000 USD/BTC. Native P&L is 10,000 x (1 / 50,000 - 1 / 55,000) = 0.0181818182 BTC, worth 1,000 USD at the exit price after carrying the unrounded BTC result. Settlement is BTC, so its later economic value continues to move.
  • Quanto and settlement-asset boundary. A named venue specifies 2 units, price movement from 100 to 110 USDT, and credits the linear numerical result one-for-one in USDC without an FX conversion: 2 x (110 - 100) = 20 USDC. If USDC trades at $0.98, its economic value is $19.60. This follows that venue’s rule, not a generic quanto formula.
  • Maintenance-margin screen. In a teaching account, starting equity is 5,000, unrealized loss is 3,600, and settled funding debit is 150, leaving 1,250. Maintenance on 50,000 notional at 2% is 1,000, so the buffer is 250. Another 300 loss leaves 950 < 1,000. The actual engine also applies tiers, open orders, fees, haircuts and staged liquidation rules.

Risks

  • Wrong venue, legal entity or jurisdiction.
  • Wrong symbol, contract version or lifecycle rule.
  • Linear, inverse or quanto payoff is confused.
  • Multiplier, quantity, lot or notional is wrong.
  • Margin and settlement currency are mismatched.
  • Index, oracle, mark, last and fill prices are confused.
  • Index or oracle fails, lags or is manipulated.
  • Funding payer sign or settlement unit is reversed.
  • Predicted funding is treated as settled cash.
  • Funding interval, cap, clamp or eligibility clock changes.
  • Perpetual-spot basis widens or fails to converge.
  • Fees, spread, slippage or partial fills dominate P&L.
  • Leverage leaves too little initial-margin buffer.
  • Maintenance tier or open-order requirement changes.
  • Cross-margin losses spread or portfolio offsets fail.
  • Collateral depegs or receives a larger haircut.
  • A gap causes staged or full liquidation at poor fills.
  • Insurance is insufficient or ADL closes a profitable position.
  • Venue, custody, API, withdrawal or counterparty fails.
  • Delisting, tax, legal, access or recordkeeping assumptions fail.

Common misconceptions

  • Perpetual means the position can exist forever. A venue can halt, delist, terminate or cash-close it.
  • Leverage multiplies the absolute payoff of a fixed position. It primarily lowers required margin and changes ROI and liquidation distance; size controls gross price P&L.
  • Mark, index, last and close prices are interchangeable. They can have different inputs and purposes.
  • Displayed positive funding guarantees a short profit. Settlement can change, and basis, fees, margin and execution can dominate it.
  • A hedge, insurance fund or ADL prevents liquidation or principal loss. Each has scope limits and can fail or forcibly reduce a profitable position.

Sources

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