Complex Systems with Patrick McKenzie (patio11) Understanding perpetual futures
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Dec 11, 2025 Explore the fascinating world of perpetual futures, the dominant trading mechanism in crypto that outpaces traditional spot trading. Patrick McKenzie dives into the intricacies of funding rates, liquidations, and the risks associated with high leverage. Discover how crypto exchanges resemble casinos aiming for capital efficiency, and learn about the innovative yet problematic concept of automatic deleveraging. Finally, ponder whether this crypto phenomenon can break into traditional finance, or if it will remain a niche tool.
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Perps Concentrate Crypto Trading Volume
- Perpetual futures let exchanges offer continuous derivative exposure without expiration dates, concentrating vast trading volume in crypto.
- They exist mainly to reduce capital requirements for exchanges and market makers by enabling more efficient gambling-like markets.
Funding Rates Create Recurring Settlements
- Funding rates settle perp gains and losses multiple times a day, shifting money from losers to winners every period.
- This mechanism keeps a perpetual contract's exposure rolling while creating recurring carry costs for traders.
Basis Trades Keep Perps Near Spot
- Perp prices often diverge from spot and attract basis traders who short perps and buy spot to capture funding and convergence.
- This delta-neutral trade pays participants to underwrite leverage and helps keep perp prices reasonably close to spot.