🎓Introduction to Perpetuals
Perps 101
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Perps 101
Last updated
Perpetual futures, often referred to as "perps," are an efficient way to trade your favorite tokens. They allow you to speculate on the future price of a token or hedge against potential price movements. Unlike traditional futures, perpetual futures contracts do not have an expiry or settlement date. This means they can be held indefinitely, hence the term "perpetual.”
Leverage
The primary advantage of perpetual futures contracts is the ability to use leverage. This enables you to take larger positions than your account balance would normally permit. If the market moves in your favor, you could potentially earn a higher return than with spot trading.
Short positions and hedging
When you buy a cryptocurrency on the spot market, you actually own the underlying asset. This is great if you plan to use it in transactions, stake it in a DeFi protocol, lend it out, or hold it in your wallet. However, some of these actions can limit your ability to protect yourself from price movements.
Perpetual futures enable traders to take short positions, meaning they can bet on a price decrease which is not as easily achievable in spot markets. This allows traders to hedge their exposure to a particular asset. For example, if you hold a cryptocurrency and are concerned that its price might drop, you could open a short position in a perpetual futures contract to offset potential losses.
For instance, let's say you have staked your SOL to a validator, but you are concerned about SOL's price dropping. If you want to sell your SOL, you must wait for a full epoch (2 days) to deactivate your SOL delegation.
While waiting for the cooldown/unstaking period to end, you can hedge your staked position by shorting the equivalent amount of SOL-Perp contracts.
While perpetuals can be a great tool for offsetting or hedging risks that exist in spot markets, it's important to understand the additional risks they come with in order to make the most of your trading experience on Zeta.
What are the additional risks of trading perpetual futures over spot?
Leverage risks: Leverage can increase your profits, but it can also amplify your losses. If the market moves against your position, you may lose more than your initial margin. In the worst-case scenario, your account may be liquidated to cover the losses incurred by your losing position.
Liquidation risk: If your account balance falls below the maintenance margin level due to market movements, your position may be liquidated.
Funding rate fluctuations: When trading perps, you either pay or receive funding fees depending on the difference between the contract price and the spot price. These rates can fluctuate significantly, and if you're on the side that pays the funding rate, it could eat into your profits or even cause losses.
