FOLLOW THE MECHANISM
- 1Open
Margin supports a long or short notional exposure.
- 2Mark
Reference prices change unrealized gains and losses.
- 3Fund
Periodic transfers encourage alignment with the reference.
- 4Close or liquidate
Settlement realizes results and releases remaining margin.
A conceptual sequence. Real implementations can add steps, intermediaries, and conditions.
Exposure without a maturity date
A perpetual future provides price exposure through a margined contract that does not have a routine expiry date. That absence removes the ordinary expiry settlement that can anchor a dated future toward its underlying market. Perpetual designs therefore use other mechanisms, commonly funding payments between position sides. The contract is not a savings product: it can incur ongoing payments, mark-to-market losses and liquidation even when it remains open indefinitely in principle.
Funding is a transfer with a direction
When a perpetual trades persistently above its reference, many designs make longs pay shorts; when it trades below, the direction can reverse. This creates incentives for trading that narrows the difference. The exact formula, time interval, caps and reference data are venue-specific. dYdX documents a premium-based funding mechanism with governance-controlled parameters. A funding rate is not universally a fixed fee charged by the exchange, nor is receiving funding a guaranteed profit.
Separate price P&L from funding
An illustrative long with 1,000 reference units of notional and a 0.01% funding charge for one interval pays 0.10 units. If the underlying price moves against it by 2%, its simple linear price loss is 20 units, far larger than that single payment. A short receiving funding can likewise lose money from price movement. Fees, collateral valuation and changes in the funding rate add other terms. Annualizing a short-lived funding observation assumes repetition that may never occur.
Margin connects the market to forced exits
Account equity includes collateral and the relevant realized or unrealized results under the venue’s rules. Maintenance requirements can trigger liquidation before equity reaches zero. Cross-margin arrangements share resources across positions; isolated margin limits the allocated pool under specified rules. Those labels do not eliminate platform, oracle or liquidation risk. A position’s health depends on the venue’s risk-reference price (an oracle price on dYdX; a mark price on some venues), collateral valuation and position direction. The useful model is a sequence of obligations and cash transfers, not a leveraged substitute for holding a coin.
MAKE IT CONCRETE
Illustrative funding reversal
A trader receives funding for one interval and pays it in the next after the premium changes sign. The word positive must be interpreted using the venue’s rate convention and the trader’s side.
FAILURE PATHS & COMMON MISREADINGS
Where the model can break
- Receiving funding can coexist with a larger trading loss.
- A perpetual price is not forced to equal spot at every instant.
KEEP EXPLORING