Risk warning: leveraged derivatives on unregulated platforms — you can lose everything you deposit. Not investment advice.

Perpetual Futures Explained: How Perps Actually Work

Perpetual futures — "perps" — are the dominant instrument on decentralized derivatives exchanges. The mechanics differ enough from spot trading and dated futures to deserve a plain explanation before you touch one. This guide covers the instrument itself, not any single venue.

What a Perpetual Future Is

A perpetual future is a derivative contract that tracks the price of an underlying asset — a token, an index, sometimes something else — without an expiry date. You aren't buying the asset; you're entering a contract whose value moves with its price.

The "no expiry" part is the defining feature. A dated futures contract settles on a fixed date: you close it beforehand or roll into the next contract, which costs time and often money. A perpetual never expires — you open a position and hold it as long as your margin supports it, with no roll and no forced exit on a calendar. What replaces expiry as the anchor to the underlying's price is funding, covered below.

Long and Short: Two Directions, One Mechanism

Perps are symmetric. Going long means you profit if the price rises and lose if it falls; going short is the reverse. Both use the same mechanism: post margin, take on leveraged exposure, and get marked to the contract price in real time. That symmetry is one appeal of perps over spot markets, where shorting is often impractical.

Leverage and Margin

To open a position you post initial margin — collateral that backs the trade. Leverage is the multiplier between that margin and the position size it controls: margin worth a fifth of the position is 5x leverage; a tenth is 10x. Margin isn't static once a position is open — as price moves against you, the unrealized loss eats into it. Maintenance margin is the floor: the minimum equity the position must retain, and dropping below it triggers liquidation.

The higher the leverage, the smaller the move needed to exhaust your margin, and the closer your liquidation price sits to your entry. A heavily leveraged position can be liquidated by a routine move; a lightly leveraged one has more room to breathe.

Liquidation

Liquidation is the venue forcibly closing your position because your margin can no longer absorb further losses. It exists to protect the exchange and other traders from a position going deeply negative, where someone else would otherwise have to cover the shortfall.

In calm markets, liquidation tends to execute close to the calculated trigger price. In fast or thin markets it can execute meaningfully worse: the position closes at whatever price is available as the market gaps through the trigger level, not the trigger level itself. Treat this as a normal possibility, not a rare edge case. See our risk disclosure.

Funding: The Anchor That Keeps Perps Honest

Without an expiry date, nothing forces a perpetual's price to converge on the underlying's spot price the way a dated future converges toward settlement. Funding does that job instead. It's a periodic payment exchanged directly between longs and shorts — the exchange doesn't keep it. When the perp trades above spot, longs typically pay shorts; when it trades below spot, shorts typically pay longs, nudging demand toward the side that pulls the contract price back toward spot.

Funding isn't a one-off fee — it's a real, ongoing cost of holding a position, charged repeatedly while it stays open. Over a short trade it's usually minor; held for weeks or months, it accumulates and can materially affect returns. See our guide to funding rates for the calculation.

Perps vs. Spot

Buying on spot means you own the asset outright: no leverage unless you borrow separately, no funding payments, no liquidation risk — the worst case is the asset going to zero. A perp gives you price exposure without ownership, plus optional leverage, an ongoing funding cost, and real liquidation risk. Spot caps your loss at the capital you put in; perps trade that simplicity for flexibility.

Perps vs. Dated Futures

Both offer leveraged, cash-settled exposure, but they anchor to the underlying differently. A dated future's price converges toward spot as expiry approaches, forcing a close or roll. A perpetual never expires — funding does that convergence work continuously instead of settlement doing it once. A dated future's cost is priced in upfront through the basis; a perpetual's cost accrues over time through funding instead.

Who Perps Are For

Perps suit traders on short-to-medium time horizons who actively manage their positions — sizing risk deliberately, watching margin levels, and adjusting or closing rather than leaving them alone. The instrument rewards active risk management and punishes neglect. They're a poor fit for buy-and-hold exposure: funding accrues indefinitely, so the longer you hold, the more it can erode returns even when your directional view turns out right. They're also a poor starting point for beginners without an existing risk-management practice — leverage amplifies mistakes as readily as gains.

To see these mechanics in action on a live venue, see our Hyperliquid overview.

Frequently Asked Questions

Can I lose more than my margin?

On most venues, liquidation is designed to close your position before losses exceed the margin you posted. In fast-moving markets, execution can slip past the trigger level, and how any shortfall is handled — insurance funds, socialized losses, other backstops — varies by venue. Don't assume your loss is always capped exactly at your margin.

What happens if I hold a perp forever?

Nothing stops you mechanically, as long as your margin stays above the maintenance level. But funding keeps accruing the entire time, in whichever direction the market dictates, and doesn't pause because you intend to hold long-term. Over an extended period that ongoing cost can become a significant drag on returns.

Do perps pay dividends or staking yield?

No. A perpetual future is a derivative contract, not the underlying asset. You never hold the asset itself, so none of the native yield that comes with owning it — staking rewards, dividends — applies to a perp position.