Payments are periodically exchanged between holders of the two sides of the contracts, long and short, with the direction and magnitude of the settlement based on the difference between the contract price and that of the underlying asset, as well as, if applicable, the difference in leverage between the two sides.
Perpetual futures were first proposed by economist Robert Shiller in 1992, to enable derivatives markets for illiquid assets.
[3][4] Cryptocurrency perpetuals are characterised by the availability of high leverage, sometimes over 100 times the margin, and by the use of auto-deleveraging, which compels high-leverage, profitable traders to forfeit a portion of their profits to cover the losses of the other side during periods of high market volatility, as well as insurance funds, pools of assets intended to prevent the need for auto-deleveraging.
Prior to spread of stablecoins in cryptomarkets all perpetual futures traded on unlicensed crypto exchanges were inverse (non-linear) futures contract, with asset being US dollar, and the price being quoted in US dollars for 1 Bitcoin.
[5] Perpetuals serve the same function as contracts for difference (CFDs), allowing indefinite, leveraged tracking of an underlying asset or flow, but differ in that a single, uniform contract is traded on an exchange for all time-horizons, quantities of leverage, and positions, as opposed to separate contracts for separate quantities of leverage typically traded directly with a broker.
[7] In 1992, Robert Shiller proposed perpetual futures, alongside a method for generating asset-price indices using hedonic regression, accounting for unmeasured qualities by adding dummy variables that represent elements of the index, indicating the unique quality of each element, a form of repeated measures design.
This was intended to permit the creation of derivatives markets for illiquid, infrequently-priced assets, such as single-family homes, as well as untraded indices and flows of income, such as labour costs or the consumer price index.
[1] In 2011, Alexey Bragin developed a solution to simplify leverage trading of cryptocurrencies for unlicensed exchanges.
These innovations enabled the setting of lots to convenient size in USD, keep price contango or backwardation under control, and settle all operations in cryptocurrency, which simplified the legal side of crypto trading.
[9] The drawback of this solution was non-linear PnL, generating specific convexity (the second derivative of a contract’s value with respect to price), so that long positions will be liquidated faster on price fall than short positions will be on price rise[10] Perpetual futures for the value of a cash flow, dividend or index, as envisioned by Shiller, require the payment of a daily settlement, intended to mirror the value of the flow, from one side of the contract to the other.
is the return on an alternative asset (expected to be a short-term, low-risk rate) between time t and t+1.