Perpetual Futures (Perps)

Perps track the price of NFT collections, allowing traders to speculate on the value of NFTs without owning them. Perps never expire (e.g. are perpetual) meaning a trader’s position will remain open until they close it or are liquidated.

Because the instruments never expire, there isn't a final payment made to the holder of the contract like there is in a regular position. Instead, perpetual futures utilize a mechanism called the funding rate, where one side of the trade pays the other a small hourly payment to keep the position.

Funding Payments

Funding payments are made from one side of the trade (long or short) to the other. When the funding is negative, shorts pay longs; when positive longs pay shorts. The goal of the funding rate is to incentivize traders to buy or sell the perp contract, pushing the price back towards the index.

When the price of the perpetual swap is cheaper than the index, longs are paid funding by shorts (negative funding). This strengthens demand for longs and encourages the perp price to increase towards the index. The wider the difference, the more negative the funding rate -- making the incentive for shorting go down further and for longing to increase until the price corrects.

On the other hand, when the price of the perpetual swap is above the index, shorts are paid funding by longs (positive funding). This strengthens demand for shorts and subsequently encourages the price to decrease towards the index. This has the opposite effect of negative funding.

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