Perpetual Swaps

Brief Definition

Perpetual swaps or perpetual contracts are effectively futures contracts that do not have an expiry date; they allow traders to long or short the future price movements of an underlying asset. To ensure that the price of the perpetual contract follows the price of the underlying spot market without ever closing down positions for expiration, traders with long positions make periodic payments to short positions (or short positions make these payments to long positions) based on the funding rate mechanism.

In order to open a long or short position, traders will need to put down initial margin or collateral. When the price moves against the trader, the resulting losses are deducted from this margin. The Increment protocol is a cross-margined system, meaning that the margin or collateral available is shared across multiple open positions. If the margin balance of the account gets too low and drops below the maintenance margin, the trader will be liquidated, meaning their position(s) will be automatically closed out. Borrowing funds to increase the position size, also known as using leverage will increase the risk of liquidation.

The on-chain architecture of the Increment protocol is quite distinct compared to its popular centralized order book counterpart. Increment uses a vAMM (virtual Automated Market Maker) system design for price discovery and trade execution.

Use Cases

  • Hedging and risk management: traders can lower their directional exposure to an asset by opening the opposite perpetuals position.

  • Short exposure: traders can bet against an asset’s performance even if they don’t hold it physically.

  • Leverage: traders can enter positions that are larger than their collateral balance.

More Information

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