Perpetuals

Definition

Also known as perps, perpetual swaps, or perpetual futures, perpetuals are a type of derivative designed to closely track the price of an underlying asset. They achieve this linkage through mechanisms such as funding rates or oracles. Unlike traditional futures, perpetuals have no expiry date, making them more flexible for traders who wish to maintain positions indefinitely.

Purpose

Perpetuals offer traders the ability to access high leverage—sometimes up to 100x—thereby amplifying both potential gains and losses. Because they do not expire, traders can hold leveraged positions for as long as they choose, provided they can meet the ongoing costs. This flexibility makes perpetuals popular among speculators and arbitrageurs.

Examples

• Funding rate perpetuals: Drift, Zeta

• Oracle perpetuals: Jupiter Perps, Flash

Funding Rate Perpetuals

In funding rate perpetuals, prices are established via an order-book model, closely resembling many traditional financial markets. Each trade requires a counterparty: one party goes long (betting on the asset’s price rising), and the other goes short (expecting the asset’s price to fall).

Key Mechanisms and Considerations:

• Price Discovery: The order book ensures that buyers and sellers interact to find mutually agreeable prices.

• Funding Rates: If the perp price diverges from the underlying asset price, funding payments occur to motivate traders to re-balance positions. When the perp trades above the spot price, longs typically pay shorts, and vice versa.

• Liquidity Challenges: If a token has low trading volume or fewer market participants, it may be difficult to match buyers and sellers efficiently. This often necessitates professional market makers who provide consistent liquidity, stabilizing the trading environment.

• Price Dislocation Risks: Without careful monitoring of funding rates, perpetual prices can stray from the underlying, particularly when liquidity dries up or sentiment shifts rapidly.

Oracle Perpetuals

In oracle perpetuals, prices are sourced from trusted external data feeds (oracles) rather than discovered through an order book. Instead of trading against other market participants, traders face a counterparty fund that automatically takes the opposite side of their trades.

Advantages:

• No Order-Book Required: Removing the need for direct buyer-seller matching can reduce slippage and friction, making trading smoother.

• Broad Asset Support: Any token with a reliable oracle price feed can be listed, enabling a wider range of markets, including those with lower liquidity or newer assets.

Trade-Offs:

• Counterparty Risk: The central fund covers the opposite side of each trade. If traders collectively profit, the fund incurs losses; if traders lose, the fund gains. Depositors into the fund must accept that their returns depend on the aggregate performance of opposing trades.

• Example on Solana: JLP is a notable counterparty fund. Jupiter incentivizes depositors by directing a portion of the fees generated on Jupiter Perps to JLP holders, compensating them for the risk of backing the trades of other users.

Disclaimer

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