Perpetual futures

Perpetual futures are derivative contracts on an asset that carry no expiry date and therefore no settlement or delivery. Because nothing forces the contract price to converge on the spot price, a periodic payment between longs and shorts, called funding, does that job instead. Positions are held on margin, marked against an external reference price, and closed automatically by the venue when the margin backing them runs out.

Funding is the headline mechanism and liquidation is the one that decides outcomes. A position closes when equity falls below the maintenance margin against the venue's reference price, so the number worth tracking is not the funding rate but the distance between the current price and the liquidation price.

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Nothing in this sequence needs the trader's participation or consent. Step 03 is the only one a position holder influences, and the only levers are posting more margin or carrying less size.

A futures contract with no expiry, and the hole that leaves

A dated futures contract converges on spot because it has to settle. Remove the expiry and that anchor disappears with it, which is the design problem perpetuals exist to solve. The academic treatment states it directly: perpetual futures are contracts without an expiration date in which the anchoring of the futures price to the spot price is ensured by periodic funding payments from long to short.⁵

One venue's own documentation puts the same thing in operating language. Perpetual contracts have no expiry and therefore no final settlement or delivery, so funding payments are used to incentivise the perpetual to trade at the price of the underlying.² When the contract trades rich, longs pay shorts. When it trades cheap, shorts pay longs.

This matters beyond trading desks because perpetuals have become the venue where price discovery for a lot of tokens actually happens. The spot pool holds the inventory. The perp holds the opinion, and usually the larger notional.

The funding rate, as one venue actually computes it

Generic explanations of funding are useless because the parameters are the mechanism. dYdX Chain runs its order book and matching engine on chain and publishes its parameters, so it is worth walking.¹ The main component is a premium, computed as the impact bid price minus the index price, or the index price minus the impact ask price, whichever side is positive, divided by the index price.²

The impact prices are not the top of the book. They are the average execution price for a market order of a defined notional size, set at 500 USDC divided by the initial margin fraction, so a market with a 10% initial margin uses a 5,000 USDC probe.² That choice is deliberate: it measures where the book can actually fill rather than where the tightest quote sits, which makes the premium harder to move with a single small order.

The rest is sampling and scaling. Premiums are taken every minute and averaged over the hour, and the funding rate is that hourly premium divided by eight plus a fixed interest rate component, which is zero for cross markets and 0.125 basis points per hour for isolated markets following governance vote 220.² It is charged hourly. There is also a cap, calculated as 600% of the gap between initial and maintenance margin, which puts an eight hour ceiling of 12% on a large cap market configured at 5% and 3%.² Run the same formula on the long tail tier at 20% and 10% and the ceiling is 60%.

Mark price and index price are different numbers, and the gap is the whole game

The index price is the external reference: what the asset trades for across the wider market. The mark price is what the venue uses to value your position for margin and liquidation purposes. Conflating them is the most common reason a trader is surprised by a liquidation that the chart appears not to justify.

dYdX Chain resolves this by marking against an oracle price rather than its own book. Each validator runs a sidecar pulling prices from named external exchanges, submits its view through vote extensions, and the network aggregates them into the oracle price for the block. That price is what determines whether an account is well collateralised, when it should be liquidated, and when stop and take profit orders trigger.³ The order book price only feeds the funding premium.

In our view that separation is the single most useful thing to check when a perpetual market lists a token you are responsible for. If the venue marks positions against its own last traded price, the depth of that one book becomes the liquidation trigger for every position on it, and the cost of moving it is the cost of triggering them.

Liquidation, with the arithmetic

Two margin parameters govern the position. The initial margin fraction sets the minimum collateral required to open it. The maintenance margin fraction sets the minimum required to keep it open, and falling below that is what invites the liquidation engine.⁴

The venue publishes the liquidation price formula and a worked case. A trader deposits $1,000 and shorts 3 ETH contracts at $3,000 with a 5% maintenance margin fraction. The liquidation price works out at $1,000 plus $9,000, divided by 3.15, which is $3,174.60. At that price the remaining equity is 3 times $3,174.60 times 5%, or about $476.20.⁴ A 5.8% move against a position opened with $1,000 of equity against $9,000 of notional ends it.

What happens next is mechanical. The engine posts a liquidation order at a calculated fillable price against resting book liquidity, the profit or loss lands on an insurance fund instead of on a counterparty, and the venue's default configuration caps the liquidation penalty at 1.5% of the account.⁴ The trader is not consulted at any point in that sequence.

What changes when your token gets a perpetual market

Three things change on the day, and none of them are in most launch plans. Price discovery migrates, because a market where positions can be opened on margin will usually carry more notional than the spot pool it references. Shorting becomes cheap, which is neither good nor bad but is new. And a population of leveraged positions now exists whose forced closure routes through whatever liquidity is available, including yours.

That last one is the connection back to the spot side. A liquidation cascade is a queue of market orders that arrive together, and the price impact they produce is a function of the depth sitting under them. A perp market listing raises the largest trade your pool has to absorb without disorderly movement, and that figure is the input the pool was supposed to be sized against.

Forced deleveraging is procyclical by construction: the orders arrive together, at the moment the book can least absorb them. That is arithmetic you can run before a listing, not after it.

Where teams misread the perp market on their own token

Open interest gets read as demand. It is not. It is the notional of positions currently open, and every long is matched by a short, so a rising number tells you positioning is growing rather than that anyone wants to hold the asset. A token can carry substantial open interest and near zero organic usage at the same time, and several have.

Funding rate gets read as sentiment. It is closer to a cost, and a persistently positive rate means longs are paying to stay long, which is a condition that tends to resolve, not persist. Reporting it as bullish confirmation in a project update is a category error and a compliance risk both.

One framing to keep. A derivatives market on your token expresses opinion about the business faster and with more leverage than spot does. It does not create the business, and a token that needs a perp market to look liquid has told you where the real problem sits. None of this is trading advice or a view on any specific market.

Common questions

What is a perpetual futures contract?

It is a futures contract with no expiry date, so it never settles or delivers. Because there is no settlement to force convergence, periodic funding payments between longs and shorts keep the contract trading close to the underlying instead.⁵ Positions are held on margin and are closed by the venue automatically once equity falls below the maintenance margin requirement.

How does the funding rate work on perpetual futures?

It transfers value between the two sides based on how far the contract trades from its reference price. When the perpetual is expensive, longs pay shorts; when it is cheap, shorts pay longs.² dYdX Chain samples a premium every minute, averages it hourly, divides by eight, adds a fixed interest component, and charges the result every hour with a published cap.²

What is the difference between mark price and index price?

The index price is the external reference for what the asset is worth across the wider market. The mark price is what the venue uses to value your position for margin and liquidation. dYdX Chain marks against an oracle price aggregated by validators from external exchanges, and that price alone decides collateralisation, liquidations and trigger orders.³ The order book price only feeds funding.

What causes a perpetual futures position to be liquidated?

Account equity falling below the maintenance margin requirement at the venue's reference price. In dYdX Chain's published example, $1,000 of equity behind a 3 ETH short opened at $3,000 with a 5% maintenance margin liquidates at $3,174.60, a move of under 6%.⁴ The engine then closes the position at a calculated fillable price with a penalty capped at 1.5%.

See Token Launch Strategy for how this applies in practice.

Sources

dYdX v4-chain repository README
dYdX Trading Inc., 2026
Primary confirmation that dYdX Chain runs a decentralised perpetual futures exchange with an on-chain order book and matching engine, self-custodial, built on Cosmos SDK and CometBFT.
Funding (Concepts, Trading)
dYdX Documentation, 2026
The premium formula using impact bid and ask prices, impact notional of 500 USDC divided by the initial margin fraction, per-minute sampling averaged hourly, funding rate as premium over eight plus an interest component, and the 600% of margin-gap rate cap with the per-tier margin table.
Oracle Prices (Concepts, Trading)
dYdX Documentation, 2026
Oracle prices assembled by the validator set from sidecars pulling named external exchanges and submitted via vote extensions, and their use for collateralisation checks, liquidation triggers and triggerable order types.
Liquidations (Concepts, Trading)
dYdX Documentation, 2026
Maintenance margin as the liquidation trigger, the published liquidation price formula and its 3 ETH short worked example resolving to $3,174.60, the fillable price mechanism, the insurance fund, and the 1.5% maximum liquidation penalty.
Perpetual Futures Pricing (arXiv:2310.11771)
Damien Ackerer, Julien Hugonnier, Urban Jermann, 2023
Formal treatment of perpetuals as contracts without expiry whose anchoring to spot is ensured by periodic funding payments from long to short, with no-arbitrage pricing for linear, inverse and quanto forms.

Last reviewed 2026-08

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