Perpetual Markets

What are Perpetual Markets? Imagine you want to bet on the price of an asset, say gold, going up or down in the future.

Instead of buying the gold and waiting, you enter into a contract with someone who has the opposite view. This contract will allow both of you to "settle" or exchange money based on the difference in gold's price from when you started the contract to a specific time in the future.

Now, in traditional futures markets, these contracts have an expiration date. This means that after a certain date, the contract ends, and you'd have to enter into a new one if you want to continue your bet.

Perpetual markets, on the other hand, are like these contracts but with a twist: they don't have an expiration date. The contract goes on indefinitely (or "perpetually") until one party decides to close their position. This allows traders to keep their positions open for as long as they want without needing to worry about the contract expiring.

To ensure that the price of the perpetual contract stays close to the actual price of the underlying asset (like gold in our example), there are mechanisms in place, such as "funding rates." Without diving too deep, funding rates are periodic payments exchanged between the contract participants based on the difference between the contract price and the spot price of the asset. This helps to keep the perpetual market in balance. So essentially you pay rent for as long as you need to keep the contract renewed.

In Summary:

  • Perpetual markets allow people to bet on the price movements of assets without actually owning them.

  • Unlike traditional futures contracts, perpetual contracts don't have an expiration date.

  • Mechanisms like funding rates help keep the contract price in line with the actual asset price.