> For the complete documentation index, see [llms.txt](https://help.defisaver.com/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://help.defisaver.com/protocols/hyperliquid/what-are-perps-perpetuals.md). # What are perps (perpetuals) {% embed url="" %} Perpetuals, often referred to as “Perps”, are one of the most popular trading mechanisms in DeFi and centralized crypto trading today. They allow users to speculate on the price movement of assets without actually owning the underlying asset itself. > Perps are built on top of the concept of futures contracts. Traditional futures contracts are agreements to buy or sell an asset at a fixed price at a future date. \ > \ > These contracts originally became popular in traditional markets for commodities such as wheat, oil, or metals, where traders wanted exposure to price movement without needing to physically store or transport the asset. In a futures contract, traders can either: * Go Long - meaning they expect the price to increase * Go Short - meaning they expect the price to decrease Unlike spot trading, where users directly buy or sell the underlying asset, futures contracts settle based on the price difference between the opening and closing value of the contract. ### The Difference Between Futures and Perps Traditional futures contracts have an expiry date. Once the contract expires, it settles and closes automatically. Perpetual contracts remove this expiry date entirely. This means positions can remain open indefinitely unless: * The trader manually closes the position * The position gets liquidated due to insufficient margin This “no expiry” structure is the main reason perpetual contracts became highly popular in crypto trading. ### Core Components Behind Perpetual Exchanges Perpetual exchanges generally rely on three main components:
* **Order Books** - The order book is a ledger of buy and sell orders placed by traders. Buyers place bids, sellers place asks, and the exchange matches them together. * **Market Makers** - Market makers continuously place their own buy and sell orders on the exchange. Their role is to provide liquidity and ensure traders can efficiently enter and exit positions with tighter spreads and lower slippage. * **Traders** - Traders are the participants opening long or short positions based on their market expectations. ### Margin and Leverage Perpetual trading is commonly associated with leverage. Instead of directly borrowing assets like users do on lending protocols such as Aave, leverage in perpetual trading simply increases exposure to an asset’s price movement. For example: * ETH price = $1,000 * Trader deposits $100 as margin * Trader opens a 10x leveraged long position This gives the trader exposure equivalent to $1,000 worth of ETH price movement. If ETH rises by 10%, the trader earns approximately $100. If ETH falls by 10%, the trader loses approximately $100. Leverage amplifies both gains and losses. ### Liquidations Because leveraged positions increase exposure beyond the trader’s deposited margin, exchanges need a protection mechanism to prevent positions from going into negative value. This mechanism is called liquidation. When losses approach the trader’s margin amount, the exchange automatically closes the position before the account becomes undercollateralized. This protects the exchange from accumulating bad debt. ### Funding Fees One of the most important mechanisms behind perpetual contracts is the funding fee system. Because perpetual contracts never expire, there needs to be a mechanism that keeps the perpetual price aligned with the spot market price. Funding fees achieve this by creating incentives between longs and shorts. #### Bullish Market Conditions If a large number of traders are aggressively opening long positions, the perpetual price may trade above the spot price due to buying pressure. In this case: * Long traders pay funding fees * Short traders receive funding fees This creates an incentive for traders to: * Reduce excessive long exposure * Open additional short positions Both effects help bring the perpetual price back closer to the spot price. #### Bearish Market Conditions If market sentiment becomes overly bearish and short positions dominate, the opposite happens: * Shorts pay funding fees * Longs receive funding fees This again helps balance the market and maintain price alignment between spot and perpetual markets. ### Delta Neutral Strategies Some traders use funding fees as a source of yield through delta neutral strategies. A delta neutral position attempts to eliminate directional price exposure by opening opposing positions on different markets. For example: * Buying ETH on the spot market * Opening an equivalent short position on a perpetual exchange In this setup, gains and losses from price movement largely offset one another. The trader’s primary objective becomes earning funding fees rather than speculating on price direction. However, funding rates can rapidly change depending on market sentiment, which means these strategies still carry risk. ### Centralized vs Decentralized Perpetual Exchanges Perpetual trading exists on both centralized exchanges (CEXs) and decentralized exchanges (DEXs). #### Centralized Exchanges (CEXs) On centralized exchanges: * User funds are held by the exchange * Trades and matching engines operate off-chain * Users typically complete KYC verification * Exchange infrastructure is not fully transparent Examples include exchanges such as Binance and Bybit. #### Decentralized Exchanges (DEXs) On decentralized exchanges: * Users retain custody of their assets through their wallet * Positions are opened through smart contracts * Trading activity can be verified on-chain * No KYC is generally required This creates a more transparent and self-custodial trading environment. Protocols such as Hyperliquid introduced additional innovations around decentralized perpetual trading infrastructure, order books, and execution models. *** ## Related Articles: * [Hyperliquid](https://help.defisaver.com/protocols/hyperliquid) * [Dashboard & Use-Case](https://help.defisaver.com/protocols/hyperliquid/dashboard-and-use-case) * [Fees](https://help.defisaver.com/protocols/hyperliquid/fees) * [How does Hyperliquid on DeFI Saver differ from direct usage?](https://help.defisaver.com/protocols/hyperliquid/how-does-hyperliquid-on-defisaver-differ-from-direct-usage) * [Hedging your Aave/Spark position with Hyperliquid](https://help.defisaver.com/protocols/hyperliquid/hedging-your-aave-spark-position-with-hyperliquid) --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. 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