Perp DEX: The Risks and Rewards of Decentralized Perpetual Contracts

Perpetual contracts have shifted towards decentralized exchanges (DEXs) called perp DEX, where traders sign every order with their own wallet. A perp DEX is a venue for open-ended futures contracts that works without a customer account in the traditional sense.

The core of a perp DEX consists of something that establishes a price, a mechanism that brings buyers and sellers together, and a rule that closes positions once the collateral posted no longer covers them. The funding rate exists to prevent the contract from drifting arbitrarily far from the actual market price.

The funding rate is a payment that flows between the two sides of the market at regular intervals. If the contract trades above the reference price, the long positions pay the short positions; if it trades below, the payment runs the other way.

At Hyperliquid, one of the larger venues, funding is settled hourly, each time at one eighth of the calculated eight-hour rate. The payment runs directly between traders, and the venue keeps none of it.