What are perps, anyway? Everything you need to know about crypto’s hottest trading instrument

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A contract that never expires

The perpetual swap, which Delo developed and BitMEX launched in 2016, resolved the problem by eliminating the expiry date entirely, creating a derivative contract that tracks the price of an asset indefinitely. There is no settlement date, no rolling and no expiry. Traders can hold a position for hours or years. This created an immediate structural challenge: without an expiry date to act as an anchor, nothing would naturally force the contract price back toward the spot price of the underlying asset. BitMEX solved this through a mechanism that has since become the industry standard.

Every eight hours, a payment is exchanged between traders on opposite sides of the market. If the perpetual swap is trading above the spot price, indicating excess demand for long positions, traders who are long pay traders who are short. If the perpetual swap is trading below spot, the payment runs the other way. The exchange takes no cut. The rate of this payment, known as the funding rate, is calculated based on how far the perpetual swap price has deviated from spot over the preceding eight-hour window. The further the deviation, the higher the rate. This creates a self-correcting equilibrium. When longs are being charged a substantial funding rate, it becomes expensive to hold the position, which reduces demand and pulls the price back toward spot. Market makers accelerate this process by shorting the perpetual swap and buying spot whenever a meaningful premium opens up, capturing the difference as profit. The funding rate mechanism is now used, in essentially the same form, by every major derivatives exchange in the world.

The role of leverage

The other defining feature of perpetual swaps is leverage. Most exchanges allow traders to control positions significantly larger than their deposited capital, with limits varying by platform and jurisdiction. At BitMEX in its prime, leverage of up to 100 times was available, meaning a 1% move in Bitcoin's price would produce a 100% gain or loss on a fully leveraged position. To manage the risk this creates for the exchange, perpetual swap platforms use automated liquidation systems. If a trader's losses approach the value of their deposited margin, the system closes the position before it can go negative, protecting the exchange from absorbing the deficit. The speed and reliability of that liquidation engine became a key competitive differentiator in the early years of the market, and remains central to how exchanges compete today.

Perpetual swaps are now the primary venue for price discovery in crypto. When bitcoin moves sharply, the move typically originates in perp markets before spreading to spot. The structure Delo built in 2016 has proven durable enough that regulators in the U.S. are now exploring its application to traditional assets, with the CME potentially listing perpetual swaps on equities. What began as a workaround for the limitations of crypto futures has become one of the most traded financial products in the world.

Disclaimer: This article is for information only and does not constitute investment advice. Digital assets involve substantial risk.