Perpetual futures — perps for short — are the most traded instrument in crypto. On a busy day the global perps market moves more notional volume than spot. Yet most people jumping into onchain trading have never had the mechanics explained clearly.
This article walks through everything you need to understand before trading perpetuals: what they are, how leverage and margin work, what funding rates do, and why onchain venues like Hyperliquid are pulling volume away from centralized exchanges.
Futures contracts in 30 seconds
A futures contract is a deal to buy or sell something at a set price on a future date. Farmers have used grain futures for centuries — lock in a price today, deliver the wheat in three months.
Traditional futures have a few traits that matter:
- Expiry date — the contract settles on a specific day and then ceases to exist.
- Rollover — if you want to stay in the position past expiry, you close the old contract and open a new one. That costs money (the "roll cost").
- Basis — the difference between the futures price and the spot price. Basis narrows as expiry approaches and reaches zero at settlement.
These mechanics work fine for commodities and treasuries. But for crypto traders who want continuous exposure, expiry and rollover are just friction.
Enter the perpetual contract
A perpetual futures contract removes the expiry date entirely. You open a position and hold it as long as you want — days, weeks, months — without ever rolling over. There is no settlement date.
The obvious problem: without expiry forcing convergence, how does the contract price stay close to the spot price? The answer is the funding rate, which we will cover below.
Perps were popularized by BitMEX in 2016 and have since become the default way to trade crypto derivatives on every major venue — Binance, Bybit, dYdX, Hyperliquid, and dozens more.
How leverage works
Leverage lets you control a large position with a small amount of capital. If you put up $100 of margin and use 10x leverage, you control a $1,000 position.
That amplifies both gains and losses proportionally:
| Scenario | Price move | Your P&L at 10x | Return on margin |
|---|---|---|---|
| Long BTC, price rises 5% | +5% | +$50 | +50% |
| Long BTC, price drops 5% | −5% | −$50 | −50% |
| Long BTC, price drops 10% | −10% | −$100 | −100% (liquidated) |
At 10x leverage a 10% adverse move wipes out your entire margin. The higher the leverage, the smaller the move needed to liquidate you.
Higher leverage means a tighter liquidation price. A 50x position gets liquidated by roughly a 2% move against you. Most experienced traders use 2–5x and reserve higher leverage for short-duration scalps with tight stops.
Going long and short
One of the biggest advantages of perps over spot trading is that you can profit from price declines just as easily as price increases.
- Long — you profit when the price goes up. This is equivalent to "buying" the asset.
- Short — you profit when the price goes down. There is no equivalent in spot trading without borrowing.
If you believe TSLA is overvalued, you can open a short perp position and profit from a decline — something that is extremely difficult in traditional stock markets for retail traders.
Margin: initial, maintenance, and modes
Margin is the collateral you post to back your position. There are two key thresholds:
- Initial margin — the minimum collateral required to open a position. At 10x leverage, initial margin is 10% of position size.
- Maintenance margin — the minimum collateral required to keep the position open, typically lower than initial margin (often 5% or less). Drop below this and you get liquidated.
Isolated vs cross margin
How your margin is allocated changes your risk profile significantly:
| Mode | How it works | Upside | Downside |
|---|---|---|---|
| Isolated | Each position has its own separate margin pool | A losing position can only lose its allocated margin — your other positions are safe | Less capital efficient; you need to manually manage margin per position |
| Cross | All positions share a single margin pool | More capital efficient; unrealized gains on one position can offset losses on another | A bad loss on one position can cascade and liquidate everything |
Most beginners should start with isolated margin until they understand position sizing well.
Funding rate: the perp price anchor
The funding rate is the mechanism that keeps the perpetual contract price aligned with the underlying spot price. It is a periodic payment between long and short traders:
- Positive funding — the perp price is above spot (premium). Longs pay shorts. This discourages further buying and nudges the price down.
- Negative funding — the perp price is below spot (discount). Shorts pay longs. This discourages further selling and nudges the price up.
Funding is typically settled every 8 hours (some venues settle hourly). The payment is proportional to your position size and the funding rate percentage.
Why funding matters for your P&L
For a quick scalp, funding is negligible. For a position held over weeks, it compounds and can become a significant cost — or a significant income stream:
If funding is consistently positive and you are short, you earn funding payments while holding your position. Some traders build "funding farming" strategies around this — but the underlying price risk still applies.
Liquidation: the hard stop
When your margin falls below the maintenance threshold, the exchange forcibly closes your position. This is liquidation. You lose your posted margin (in isolated mode) or potentially more (in cross margin mode).
A simplified liquidation price for a long position:
Liquidation price ≈ Entry price × (1 − 1 / leverage)
At 10x leverage, your liquidation price is roughly 10% below your entry. At 50x, it is roughly 2% below. This is why leverage and position sizing are inseparable decisions.
Perps vs spot: when to use which
| Dimension | Spot trading | Perpetual futures |
|---|---|---|
| Ownership | You own the actual asset | You own a contract — no underlying asset |
| Direction | Long only (buy low, sell high) | Long or short |
| Leverage | 1x (no leverage) | 1x to 50x+ depending on venue and asset |
| Holding cost | None (you own it) | Funding rate payments |
| Liquidation risk | None (price can drop to zero but no forced close) | Yes — margin below maintenance = liquidated |
| Best for | Long-term holding, accumulation | Short-term trading, hedging, leveraged directional bets |
Neither is inherently better. Spot is for conviction holds. Perps are for expressing short-term views, hedging existing positions, or using leverage efficiently.
The onchain shift
For years, perpetual trading was dominated by centralized exchanges (CEXs) — Binance, Bybit, OKX. These work well but come with trade-offs: custody risk, KYC requirements, opaque liquidation engines, and occasional withdrawal freezes.
Onchain perpetual exchanges eliminate the middleman. You trade directly from your wallet, and the matching engine, margin system, and settlement all run on a blockchain. The main platforms driving this shift:
- dYdX — one of the earliest onchain perp DEXs, now running its own appchain.
- GMX — AMM-based perps on Arbitrum, popular for its liquidity pool model.
- Hyperliquid — a purpose-built L1 blockchain with a fully onchain order book that matches CEX-level performance (sub-second finality, deep liquidity).
Hyperliquid stands out because it runs a central limit order book (CLOB) natively on its own L1 chain — the same trading model as Binance or the NYSE, but fully onchain and non-custodial.
What HIP-3 adds to the picture
On most exchanges — centralized or decentralized — a single team decides which markets exist. Hyperliquid's native perps are curated by the core team. That keeps quality high but limits coverage.
HIP-3 changes this by allowing independent builders to deploy their own perpetual markets on Hyperliquid. Each builder stakes 500,000 HYPE, chooses which assets to list, picks a collateral type, sets fee structures, and earns 50% of trading fees from their markets.
The result: over 130 perpetual markets across 6 builders, covering asset classes that no single exchange would list — US stocks, commodities, forex, Pre-IPO companies, and crypto — all trading 24/7 on Hyperliquid's L1. The execution layer is shared, but each builder's markets still have their own liquidity, collateral, and fee profile.
If the concept of independent builders deploying their own perp markets sounds interesting, the next article explains the full picture: how HIP-3 works, who the builders are, and what it means for traders.
Now that you understand how perpetual futures work — leverage, margin, funding, and liquidation — you have the foundation to navigate the HIP-3 builder ecosystem. The perp mechanics are familiar across builders, but market selection, liquidity, collateral type, fee model, and trading experience can differ meaningfully from venue to venue.
Try trading a stock perpetual on Hyperliquid