What Is a Perpetual Swap (Perp)?
The perpetual swap, or "perp," is the most traded product in crypto — the contract behind nearly all the leverage and liquidation activity you hear about. It's a futures contract with no expiry date, which is exactly what makes it both convenient and slightly strange. This guide explains what a perp is, how it stays tethered to spot, and the mechanics you need to know before trading one. It's educational, not financial advice.
A derivative, not the coin itself
When you trade a perpetual swap, you are not buying the underlying coin. You're trading a contract whose value tracks that coin's price. This is a derivative: its price is derived from the underlying market. You never take delivery of the asset; positions are settled in a quote currency (often a stablecoin) based on how the price moved.
This distinction has real consequences. You can hold a large amount of exposure with a small amount of collateral (leverage), you can go short as easily as long, and you have no wallet full of the actual coin — just an open position with an unrealized profit or loss. It's a tool for trading price movement, not for owning and holding an asset.
How perps differ from dated futures
Traditional futures contracts have an expiry date: on a set day, the contract settles and ceases to exist. As expiry nears, the futures price converges to spot, and traders who want continued exposure must "roll" into the next contract. This is workable but clunky.
A perpetual swap removes the expiry entirely. You can hold the position indefinitely — hence "perpetual." That solves the rollover hassle, but it creates a new problem: with no expiry to force convergence, what keeps the perp's price in line with spot? A dated future is anchored by its settlement date; a perp has no such anchor built in. The solution is the funding mechanism.
Funding keeps the perp near spot
The funding rate is the clever mechanism that replaces the expiry. It's a small recurring payment between long and short traders (not collected by the exchange) that pulls the perp price toward spot.
When the perp trades above spot, longs pay shorts, discouraging buying and nudging the price down. When it trades below spot, shorts pay longs, encouraging buying and lifting the price up. This constant economic pressure keeps the perpetual price hovering close to the real spot market without any settlement date. Funding is charged periodically — commonly every 8 hours on many venues, though this varies — and only to traders holding a position at that timestamp. The dedicated funding-rates guide covers the details, and RektCalc's funding tools help you estimate the cost on your own position.
Mark price, index price, and why they matter
Perps use more than one price, and confusing them causes a lot of grief. The last traded price is simply the most recent fill on that exchange's order book — it can spike or dip on thin liquidity. The index price is an average of spot prices across several major exchanges, representing the asset's "true" value. The mark price is a smoothed reference, based on the index plus a funding component, used by the exchange for calculating unrealized P&L and, critically, for triggering liquidations.
Why this matters: your liquidation is generally decided by the mark price, not the last traded price. This protects you from being liquidated by a brief, manipulative wick on one exchange's order book that doesn't reflect the wider market. But it also means the number you watch for liquidation should be the mark price, not the flickering last price. Knowing which price governs your position removes a lot of confusion in a fast market.
Linear vs inverse: two ways a perp settles
Not all perps settle the same way. A linear (USDT-margined) perp uses a stablecoin as both collateral and settlement currency — your margin, your P&L, and the contract's quoted value are all in USDT (or USDC). This is the default on most exchanges and the easiest to reason about: if BTC moves $1,000 in your favor, your P&L is a fixed dollar amount regardless of BTC's price.
An inverse (coin-margined) perp flips this: you post the base coin itself as margin, and P&L is also settled in that coin. A BTC/USD inverse contract is collateralized in BTC, not USDT. This matters because your collateral's dollar value moves with the market at the same time your position does — on a losing short, both your position and your margin lose dollar value together, amplifying drawdowns; on a winning long, both gain together. Inverse contracts also have a non-linear payoff curve (P&L isn't a constant dollar-per-point), which is why exchanges quote them in contracts rather than coin size. Traders who already hold the coin and want to hedge without touching stablecoins sometimes prefer inverse perps for that reason. RektCalc's coin-margined PnL calculator models this settlement math directly, separate from the linear math used elsewhere on the site.
Leverage, margin, and the risks
Perps are almost always traded with leverage: you post margin (collateral) and control a larger notional position. Leverage magnifies both gains and losses relative to your collateral, and it's why perps are associated with liquidation. The higher the leverage, the closer your liquidation price sits to your entry.
Before trading a perp, three numbers deserve attention: your liquidation price (where the position is forcibly closed), your position size relative to risk (so a loss is survivable), and the funding rate (the carrying cost of holding). RektCalc's liquidation and position size calculators are built for exactly this. A perp is a flexible, powerful instrument — but the flexibility is only safe when you understand the mechanics that sit underneath it.
Insurance fund and auto-deleveraging (ADL): what happens after liquidation
Liquidation isn't the end of the story — it's just the exchange closing your position. What happens next depends on where the market lands relative to your bankruptcy price, the level where your margin hits exactly zero. If the exchange can close you at or before bankruptcy price, the trade is done. If price gaps through it during a fast move, the loss exceeds your margin, and someone has to absorb that gap.
That someone is normally the insurance fund: a pool the exchange builds up from the fees on liquidations that close favorably. It exists specifically to cover negative-equity gaps so the trader on the other side of your position still gets paid in full, without the exchange eating the loss itself.
The fund isn't bottomless. In a large enough cascade — a fast multi-percent move with heavy leverage stacked on one side — liquidations can drain it faster than favorable closes refill it. When that happens, exchanges switch to auto-deleveraging (ADL): instead of the fund covering the shortfall, the exchange force-closes some of the most profitable opposite-side positions at the losing side's bankruptcy price. Exchanges typically rank the ADL queue by profit percentage divided by maintenance margin ratio, so a highly profitable, highly leveraged position sits at the front of the line — it can get closed out mid-trade with no warning beyond the ADL indicator on the position, even though it never touched its own liquidation price.
A minority of exchanges use socialized loss (clawback) instead of ADL for the same shortfall: rather than force-closing specific winners, they haircut a percentage off every profitable trader's session PnL. Either mechanism means "my liquidation price wasn't hit" doesn't guarantee your position is untouched during a severe cascade. RektCalc's ADL risk score calculator estimates your place in that queue, the bankruptcy price calculator shows the gap the insurance fund is covering on your own position, and the socialized-loss clawback calculator models the haircut version of this risk.
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Frequently asked questions
What's the difference between a perpetual swap and regular futures?
Dated futures have an expiry date and settle on that day, requiring you to roll positions to stay in. A perpetual swap has no expiry, so you can hold indefinitely — and it uses a funding rate instead of an expiry to keep its price near spot.
Do I own the crypto when I trade a perp?
No. A perpetual swap is a derivative that tracks the coin's price. You hold a position settled in a quote currency, not the underlying asset itself, so you never take delivery of the coin.
Why does my liquidation use mark price instead of the price I see?
Exchanges use the mark price — a smoothed value based on a cross-exchange index — to trigger liquidations so a brief wick on one order book can't unfairly liquidate you. Watch the mark price, not the flickering last-traded price, to gauge liquidation risk.
What's the difference between a linear and an inverse perp?
A linear (USDT-margined) perp uses a stablecoin for both margin and P&L, so gains and losses are a fixed dollar amount. An inverse (coin-margined) perp uses the base coin itself for margin and settlement, so your collateral's dollar value moves with the market alongside your position — amplifying both gains and losses compared to a linear contract.
Can I lose money on a perp even if my liquidation price is never hit?
Yes, in an extreme cascade. If the exchange's insurance fund is depleted covering other traders' negative-equity liquidations, some exchanges use auto-deleveraging (ADL) to force-close the most profitable opposite-side positions at the losing side's bankruptcy price — or apply a socialized-loss haircut across all profitable traders. Either way, a position that never touched its own liquidation price can still get closed or trimmed.
Educational only — not financial advice.