How Perpetual Futures Work and Why They Matter

Transcript

Perpetual futures, or [music] perps, are one of the most traded instruments in crypto today. In 2025, exchanges [music] processed trillions in volume, earned billions of dollars in revenue, and began onboarding new types of traders and markets. The top [music] 10 centralized exchanges alone processed over $86 trillion in trading volume. [music] So, perps are clearly a popular product today in crypto. And I think an interesting question is like, where where did this come from? Why do perps not have an immediate traditional analog? If we wind the clock back, I think really the oldest historical analog for something like a perp was [music] a bucket shop. You know, around and before the Great Depression, the bucket shop as an idea was basically that, [music] you know, we had stock prices

and tickers for the first time, along with telegraph machines. And so, anywhere in the country, you could have a telegraph transmission of the price on [music] the New York Stock Exchange for some equity, and you could trade against that price feed. And you were not directly buying the equity, but rather you were essentially buying a derivative where your counterparty was >> [music] >> the bucket shop itself. I think the closest thing to a perpetual future is a CFD, or contract for difference, [music] which is relatively popular in in Europe and in parts of the Middle East. You see CFDs start to pop up in the '80s, and then, you know, proliferate from there.

>> Perpetual futures aren't new. They were originally proposed in 1993 by Robert Shiller, a Nobel Prize winning economist, who originally envisioned them as a tool for hedging property value risk. [music] But, they were popularized in crypto with the growth of BitMEX. The first perp on BitMEX allowed traders to speculate on the price of Bitcoin. [music] >> 10 years later, decentralized exchanges offer perps on equities, indices, commodities, interest rates, startup valuations, and even collectibles. There are a few key components [music] to a perp. Perps are derivative contracts that give traders synthetic exposure to an underlying asset. [music] Traders can speculate on the price of an asset without owning the asset itself.

Directional exposure, you can go long if you think the price is going up, or short if you think it's going to [music] go down. They get exposure without settlement friction or having to borrow the underlying asset in the case of shorts. Perps don't expire like traditional futures. [music] Traders can hold their positions for a few seconds, a few years, or theoretically, forever. [music] Leverage. Perps are capital efficient, allowing traders to control a large position with a small [music] amount of capital. This also means that traders' entire positions can be more easily wiped out or liquidated. Funding. The funding rate is a periodic payment between long positions and short positions. [music] This mechanism and its subsequent arbitrage is what keeps the price of the perp tethered [music] to the price of the underlying asset.

>> You know, you start to see perps become popular in crypto first in a centralized context, and then I think part of the reason you started to see more interest in perps on chain and in decentralized venues is, you know, [music] at least in part, because you could offer many more different [music] perps and and, you know, many more different price feeds. And a perp inherently is relatively easy to offer on chain because [music] it's a fully synthetic asset. You know, you are, when you take a position, trading against an index price, and as long as you have a reliable oracle, then it's [music] fairly straightforward to, you know, normalize that oracle and then and then trade against it.

>> Perps strip out a lot of the complexity that traditionally comes with trading options, and [music] they have structural advantages. Most perp positions trade 24/7, meaning users are [music] not subject to market hours. They don't have to select the strike or an expiry, and they don't have to reestablish the trade every [music] day or week. >> So, I I think one obvious reason people like to trade perps is that usually you can get much more leverage as a retail investor on a specific asset by trading the perp on a decentralized exchange [music] venue than you could get anywhere else. I think there is this, you know, big lingering question over the [music] industry as to whether institutions in mass adopt perpetual futures and adopt prediction markets >> [music] >> as an alternative to the existing derivative structures that are very popular in traditional finance things

like futures [music] and options. Uh I I think we see some early examples of this. You know, I I would say particularly commodity perps, uh especially when there is big macroeconomic news about uh you know, some event that affects a commodity and traditional derivative markets in the US are closed because it's a weekend, >> [music] >> but the hyperliquid market is open. Uh in in some cases we've seen uh what what you know, could be the first examples of price discovery happening on a decentralized perpetual futures exchange as opposed to on more traditional uh futures and and derivative exchanges. And uh you know, this is something we're >> [music] >> we're interested in. I I think there's good potential that we'll see more and

more of over time.