How perpetual futures work

A perpetual future is a futures contract with no expiry date. Like any future, its price tracks an underlying asset, but instead of settling on a fixed date, it can be held open indefinitely. To keep its price tethered to the spot market despite never expiring, it uses a recurring cash payment between traders called funding.

This article explains how the mechanism works and the risks that come with it. It is educational only. It does not recommend trading perpetuals, does not suggest entries, leverage levels, or targets, and is not financial advice.

Start with an ordinary future

A traditional futures contract is an agreement whose value references an underlying price, with a set expiry date. On that date it settles — either the asset is delivered or the cash difference is paid — and the contract price converges to the spot price as expiry approaches. That convergence is the anchor: no matter how far a future drifts from spot in between, expiry pulls the two together.

Perpetual futures remove the expiry date. That is convenient for traders who do not want to roll positions from one contract month to the next, but it also removes the natural anchor. Without expiry, what stops a perpetual’s price from drifting away from spot and staying there? The answer is the funding mechanism.

How the funding mechanism anchors the price

Every few hours (commonly every eight hours on major venues such as Binance and Deribit, though intervals vary), the contract calculates a funding rate. This rate determines a payment that flows directly between traders holding the two sides of the contract:

• When the perpetual trades above the spot-linked reference price, the rate is typically positive: holders of long positions pay holders of short positions.
• When the perpetual trades below the reference, the rate is typically negative: shorts pay longs.

The payment creates a cost to being on the “expensive” side and a small reward for being on the “cheap” side. That incentive nudges traders to close or open positions in a way that pushes the contract price back toward spot. Crucially, on most venues funding is paid between traders — the exchange usually does not take the funding itself; it acts as the plumbing. This is the core substitute for expiry-driven convergence, and it is important enough that we cover it in depth in a separate article on funding rates.

Mark price, margin, and why they matter

Two more pieces make perpetuals work: the mark price and the margin system.

• Mark price. To decide unrealised profit, loss, and whether a position is healthy, exchanges usually do not use the last traded price — that can be spiked by a single thin trade. Instead they use a mark price derived from an index of spot prices across several venues, plus a fair-value adjustment. Using a smoothed, index-based mark reduces the chance that a brief wick on one exchange unfairly triggers closures.
• Initial and maintenance margin. To open a position you post initial margin. To keep it open you must keep your equity above the maintenance margin. If the mark price moves against you and your equity falls below maintenance, the position is at risk of liquidation.

Because margin is only a fraction of the position’s notional value, perpetuals are inherently leveraged. A position opened with 10x leverage controls ten times the value of the margin behind it, so a price move is felt roughly ten times as hard on your account equity — in both directions.

A simple, illustrative walk-through

These numbers are made up to show the mechanics; they are not market data.

• Suppose the reference price of an asset is 100 units and a trader opens a long perpetual position worth 1,000 units of notional, posting 100 units of margin (10x leverage).
• If the mark price rises to 105, the position’s value rises by about 50 units — a large percentage gain on the 100-unit margin.
• If instead the mark price falls to 95, the position loses about 50 units, cutting the margin in half and moving it closer to the maintenance threshold.
• Separately, if the perpetual is trading above spot when funding is calculated, this long trader also pays a small funding amount to shorts; if below, they receive it.

The example shows two independent forces at work: price movement (which drives profit, loss, and liquidation risk) and funding (a recurring transfer that keeps the contract tethered to spot).

Isolated versus cross margin

How margin is organised is part of the mechanism and directly shapes risk. Exchanges typically offer two modes:

• Isolated margin. Only the margin assigned to a specific position is at stake. If that position is liquidated, the loss is capped at the isolated amount and the rest of the account is untouched. The trade-off is that the position has a thinner buffer and reaches liquidation sooner.
• Cross margin. The whole account balance backs the position. That provides a deeper buffer against liquidation, but it also means a single bad position can draw down — and in the worst case liquidate against — the entire account.

Neither is “safer” in the abstract; they distribute risk differently. Understanding which mode a position uses is essential to understanding what a given price move can actually do to an account.

Open interest: reading the contract layer

Perpetuals introduce a data point that has no spot equivalent: open interest, the total value of contracts currently open. Because every contract has a long and a short, open interest measures how much leveraged exposure is outstanding, not how many coins exist. A rising open interest means more leveraged positions are being built; a sharp fall often means positions are being closed or liquidated. Read alongside funding, it helps describe how crowded and how leveraged a market is — though, like all such measures, it describes the present rather than predicting the future, and this article offers no signal from it.

The risks built into the design

• Leverage cuts both ways. The same mechanism that magnifies gains magnifies losses, and it does so on a smaller price move than spot.
• Liquidation. If maintenance margin is breached, the position can be closed automatically at a bad moment. Cascades of forced closures can move prices sharply, which we cover in how liquidations cascade.
• Funding drift. Holding a position through many funding periods can accumulate meaningful funding costs, independent of whether the price moved your way.
• Reference and venue risk. The mark price depends on the exchange’s index and risk engine. Different venues compute these differently, so identical-looking contracts can behave differently in stressed conditions.
• Complexity risk. A perpetual bundles several moving parts — leverage, mark price, margin mode, and funding — that interact. A trader who understands only the price and ignores funding or margin mode can be surprised by outcomes that the mechanism made entirely predictable.

These risks are inherent to the instrument’s design rather than flaws in any particular venue. They are the price of the flexibility that makes perpetuals popular: no expiry to manage, fine-grained leverage, and continuous tracking of spot. Understanding them is simply understanding what the contract is.

What this means

A perpetual future is an elegant piece of financial engineering: a contract that never expires, kept close to spot by a recurring funding payment between traders, valued against an index-based mark price, and backed by a margin system that can force it closed. Understanding it means holding three ideas at once — no expiry, funding as the anchor, and leverage as the amplifier. None of that tells you whether to trade one; it tells you what you are actually holding if you do. For the pieces underneath, read our explainers on funding rates, liquidation cascades, and the broader spot-versus-derivatives distinction.