In one sentence: It's the immortal version of futures contracts—no expiration date, hold as long as you want, leverage up, go long or short as you please, but every 8 hours, longs and shorts have to pay each other (funding rate), otherwise the price drifts too far and no one pulls it back.
 

First, let's talk about traditional futures contracts (the old big brother)

Futures mean signing a contract today to buy/sell a bunch of stuff at XX price in three months.
  •  Has an expiration date, must settle upon expiration (cash or physical delivery)
  • Can hedge (farmers lock in grain prices), leverage, short selling
  • Price deviates from spot as expiration approaches (the farther the expiration, the more deviation due to holding costs)

How did perpetual contracts come about?

Traditional futures require rolling over at expiration, which is troublesome!

Crypto big shots slapped their heads: Let's make a version without an expiration date!

Thus, perpetual contracts were born: price always sticks to spot, tethered by the "funding rate" rope.

Core mechanisms of perpetual contracts, understand in 5 minutes

1. No expiration date

Want to hold for a year? Go ahead!
 

2. Leverage as high as you want

1x to 125x (125x = pure suicide)
 

3. Funding rate: Every 8 hours, longs and shorts pay each other

  • Contract price > spot price → positive rate → longs pay shorts (to push price down)

  • Contract price < spot price → negative rate → shorts pay longs (to lift price up)

    In bull markets, rates are chronically positive, shorts lie back and collect money; in bear markets, rates are heavily negative, longs collect money happily.

4. Mark price: "Fair price" to prevent manipulation

Latest price is easily manipulated by smash trades; liquidation uses mark price to prevent you from being burst by a single needle.
 

5. Insurance fund + auto-deleveraging: Final anti-liquidation mechanism

  • You get liquidated to negative, insurance fund covers the hole (grows by eating liquidation fees)
  • Insurance fund not enough → ADL auto-deleveraging, big players get cut first (highest profit first)

Real case: Let's do the math for you

You have 1000U principal, 20x leverage going long BTC
  • BTC up 5% → you earn 1000U (principal doubles)
  • BTC down 4.5% → you get liquidated, 1000U goes to zero
  • Funding rate 0.1%/8 hours → you as long pay 30U per day (high rate environment = chronic bleeding)

Why do so many people play perpetuals?

  • Bull market accelerates getting rich quick (max leverage)
  • Bear market still lets you eat meat (short selling)
  • Funding rate arbitrage (spot + contract hedge to earn passively)
  • 24/7 non-stop, get on and off anytime

Why do so many people die in perpetuals?

  • A single red candle from millions to zero (high leverage exclusive)
  • High funding rate holding = chronic suicide
  • Liquidation cascade: Others' liquidations chain react, and you go down too

Retail survival iron rules

  1. Leverage no more than 10x, newbies cap at 5x
  2. Must set stop-loss + take-profit, no set = running naked
  3. Check funding rate before opening position, positive over 0.05% be careful longing, negative below -0.05% be careful shorting
  4. In bull market don't die longing, in bear don't die shorting, run when trend reversal signals appear

Final blood-tear summary

Perpetual contracts are the sharpest double-edged sword in crypto:

Badass people use it to amplify profits,

Idiots get amplified into liquidated corpses by it.

Want to play? Sure.

First engrave funding rate, mark price, insurance fund on your forehead,

Then decide whether to pull up the leverage.

Those who survive playing perpetuals can finally eat the real meat;

The dead ones are forever just a string of numbers in the funding rate.

Choose, brother.