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Perpetual futures, or perpetual swaps, are cash-settled derivative contracts that allow traders to hold positions indefinitely without a pre-specified delivery date. Originally proposed by economist Robert Shiller in 1992 to facilitate derivatives markets for illiquid assets, the instrument was later adapted for cryptocurrency markets in 2011 by Alexey Bragin. Unlike traditional futures, perpetuals utilize a funding mechanism to keep the contract price aligned with the underlying asset's spot price, often incorporating high leverage and features like insurance funds or auto-deleveraging to manage volatility.
Perpetual futures lack expiration dates, allowing positions to be held indefinitely without the need for contract rollovers.
The funding mechanism is a core feature used to incentivize the contract price to remain close to the underlying asset's spot price.
Cryptocurrency perpetuals often feature high leverage, with some platforms offering up to 500x, and utilize mechanisms like insurance funds to mitigate risks.
Recent developments in the sector include the integration of AI-driven interfaces and the expansion of pre-IPO proxy offerings for traditional company stocks.
Decentralized exchanges and self-custodial wallet providers have increasingly integrated perpetual trading, moving away from traditional broker-based models.
Traditional futures have a pre-specified delivery date and require rolling over contracts, whereas perpetual futures can be held indefinitely and use a funding mechanism to maintain price alignment.
The funding mechanism is used to periodically exchange payments between long and short holders to keep the perpetual contract price close to the underlying asset's price.
While perpetual futures markets primarily developed within the cryptocurrency sector, they are increasingly being used for pre-IPO stocks and were originally conceptualized for illiquid assets like real estate.
High-leverage trading can lead to rapid liquidations, and some platforms employ auto-deleveraging, where profitable traders may forfeit a portion of their gains to cover the losses of others during high volatility.
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