Article 3.1: Perpetual Contracts Explained The Backbone of Crypto Trading
The Infinite Trade – How Perpetual Contracts Work & Why They Dominate Crypto Markets
Imagine a bet that never expires—a trade you can hold for days, weeks, or even months, as long as you have enough collateral to maintain it. This is the essence of perpetual contracts (perps), the most traded instrument in crypto derivatives markets today.
Unlike traditional futures contracts, which expire on a set date, perps remain open indefinitely. This flexibility has made perpetual swaps the dominant instrument in crypto trading, with trillions of dollars in trading volume monthly.
Perpetual contracts allow traders to:
✅ Go long (betting price will rise)
✅ Go short (betting price will fall)
✅ Use leverage to amplify position sizes
✅ Trade without expiry dates
However, this also means that funding rates (covered in Article 3.2) and liquidation risks (covered in Article 3.3) play a huge role in perpetual trading.
🕰️ The Evolution of Perpetual Contracts
📜 Who Invented Perpetual Contracts?
The concept of perpetual futures contracts originated in 1992 when Nobel Prize-winning economist Robert Shiller proposed a new type of futures contract that never expires. His idea was to create a hedging instrument for economic risks, allowing traders to maintain long-term exposure without rolling over contracts.
However, traditional finance never fully adopted perpetual futures—primarily due to liquidity constraints and lack of demand.
Crypto changed everything.
💡 How Perpetuals Became Crypto’s Most Traded Instrument
In 2016, BitMEX (Bitcoin Mercantile Exchange), co-founded by Arthur Hayes, launched the world’s first crypto perpetual swap. Hayes recognized two major problems in crypto derivatives markets:
Traditional futures had expiry dates, forcing traders to roll over contracts regularly.
Futures and spot market prices often deviated significantly, leading to inefficiencies.
The BitMEX Solution:
💡 A perpetual futures contract with no expiry, using a funding rate mechanism to keep prices aligned with the spot market.
This innovation revolutionized crypto trading, making perps the most widely used instrument in crypto derivatives today.
⚡ The Rise of Perpetuals in DeFi
As centralized exchanges (CEXs) like Binance, Bybit, and FTX embraced perps, decentralized perpetual exchanges also emerged. Platforms like dYdX, GMX, and RabbitX brought perpetual contracts to DeFi, allowing on-chain trading with self-custody.
🛠 How Perpetual Contracts Work
Unlike traditional futures, perps don’t settle on a specific date. Instead, they rely on funding rate mechanisms to maintain price equilibrium (explained in Article 3.2).
📝 Key Differences: Traditional Futures vs. Perpetuals
Feature
Traditional Futures
Perpetual Contracts
Expiry Date
Yes (fixed date)
No expiry
Rollover Costs
Yes (contract rolls over)
No need for rollovers
Funding Rate
No
Yes (charged every 8 hours)
Leverage
Yes (lower leverage)
Yes (often higher leverage)
Common Markets
Commodities, Stocks, Crypto
Crypto (Perps dominate)
🔹 Why This Matters: Perps allow traders to maintain exposure indefinitely, but funding rates and liquidation risks must be managed.
🎯 How Perps Work on RabbitX
📌 Step-by-Step Execution on RabbitX
1️⃣ Choose a Trading Pair: Select BTC/USDT, ETH/USDT, or any other available asset.
2️⃣ Set Position Type: Go long (if bullish) or short (if bearish).
3️⃣ Apply Leverage: Adjust leverage (e.g., 5x, 10x, 25x) depending on risk tolerance.
4️⃣ Enter Trade: Place a market or limit order (covered in Module 2).
5️⃣ Funding Rates Apply: If your position stays open beyond funding periods, you pay or receive funding fees (covered in Article 3.2).
6️⃣ Risk of Liquidation: If price moves against you, liquidation may occur (covered in Article 3.3).
✅ Interactive Example: (Insert Screenshot of RabbitX trading UI showing how to place a perp trade.)
✅ Live Walkthrough Video: (Insert RabbitX video tutorial for new users.)
🚨 Risks of Perpetual Trading
While perps provide flexibility and leverage, they come with significant risks:
🔴 Liquidation Risk: If price moves against your position too much, you lose all your collateral.
🔴 Funding Rate Costs: Holding positions for long periods can erode profitability.
🔴 Market Manipulation: Large traders (whales) can force liquidations by driving prices up/down.
💡 Risk Management Tip: Use stop-losses, lower leverage, and proper margin allocation to avoid forced liquidations (explored in Article 3.3).
📌 Key Takeaways from Article 3.1
✔ Perpetual contracts are futures without expiry, making them ideal for crypto’s 24/7 markets.
✔ BitMEX pioneered perps in 2016, making them the dominant crypto derivative instrument.
✔ Funding rates and liquidation risks make risk management essential.
🚀 Next Up: Funding Rates – The Hidden Tax (or Reward) of Perp Trading!