Perpetual Swap Funding
Perpetual swap funding is the mechanism that ensures the price of a perpetual futures contract stays anchored to the underlying spot index price. Because these contracts have no expiration date, they rely on a funding fee exchanged between long and short traders.
If the perpetual price trades above the index, longs pay shorts, incentivizing selling and pushing the price down. If it trades below, shorts pay longs, incentivizing buying.
This mechanism is the heartbeat of the perpetual swap market. It effectively manages leverage and prevents long-term divergence from the spot market.
Glossary
Funding Rate
Mechanism ⎊ The funding rate is a critical mechanism in perpetual futures contracts that ensures the contract price closely tracks the spot market price of the underlying asset.
Perpetual Contract
Contract ⎊ A perpetual contract represents a derivative instrument, primarily observed within cryptocurrency markets, that replicates the payoff profile of a traditional futures contract without a predetermined expiry date.
Spot Market
Asset ⎊ The spot market, within cryptocurrency and derivatives, represents the immediate exchange of an asset for its current prevailing price, facilitating direct ownership transfer.
Capital Efficiency
Capital ⎊ Capital efficiency, within cryptocurrency, options trading, and financial derivatives, represents the maximization of risk-adjusted returns relative to the capital committed.