How Perpetual Futures Contracts Work, And The Hidden Risks
Perpetual futures contracts are shifting away from traditional exchanges and towards venues known as perp DEX, where traders sign every order with their own wallet. Unlike conventional futures, perpetual contracts have no expiry date and can drift arbitrarily far from the actual market price.
The funding rate is a payment that flows between long and short positions at regular intervals to prevent this drifting. On Hyperliquid, for example, the funding rate is calculated hourly and paid directly between traders, with the venue taking none of it.
The formula for calculating the funding rate includes a premium index, which measures the gap between the contract price and reference price, as well as a fixed interest component that goes to the short side. This interest component is capped at plus/minus 0.0005 and has a hard limit of four percent per hour.
Liquidation occurs when a trader's capital falls below two-thirds of the maintenance margin, which varies by leverage level and asset on different perp DEX platforms. Backstop liquidation takes over if ordinary market orders are insufficient to unwind the position, resulting in losses beyond the arithmetic distance to the liquidation price.