Perpetual Futures Explained: Funding, Mark Price and the Liquidation Engine

A future with no expiry date

A traditional future settles on a date. A perpetual future never does. You can hold a BTCUSDT perpetual for an hour or a year, and it just keeps tracking Bitcoin. That convenience made perps the dominant crypto derivative by a wide margin: on most days they trade multiples of the entire spot market's volume.

The catch is that removing expiry removes the natural mechanism that pulls a future's price back to the spot price at settlement. Something has to replace it, or the contract drifts away from the asset it claims to track. That replacement is the funding rate.

Funding: the anchor that replaces expiry

Every eight hours on most venues, one side of the market pays the other. If the perpetual trades above spot, longs pay shorts, which nudges traders to sell the perp and buy spot until the gap closes. If it trades below, shorts pay longs. The payment is a percentage of your position size, not your margin.

The numbers look tiny and compound viciously. A 0.03% funding rate paid three times a day is roughly 0.09% daily, about 33% annualized on the full position. On a 10x position, that drag applies to ten times your margin. We cover the full math in our funding rates guide, but the headline is simple: perps are expensive to hold.

Mark price vs last price

Every perp has two prices. Last price is whatever the most recent trade on that venue printed. Mark price is a smoothed fair value built from a basket of spot indexes plus a decaying funding basis. Your unrealized profit and loss, and critically your liquidation, run on mark price, not last price.

This exists to stop manipulation. Without it, someone could slam a thin order book, print one ugly trade, and liquidate everyone on the venue. With mark price, a single-exchange wick mostly cannot touch you. It also means your position can be liquidated at a mark price your venue's own chart never displayed as a trade.

How liquidation actually proceeds

Open a $10,000 long at 20x and you post $500 of margin. The exchange sets a maintenance margin, say 0.5% of position value. When losses at mark price eat your $500 down to roughly $50, the engine seizes the position. You do not get a phone call. It happens in milliseconds, and at 20x it takes about a 4.5% move.

The engine first tries to close the position on the order book. If the market is moving too fast and the close finishes below your bankruptcy price, the insurance fund covers the gap. If the fund itself runs dry, venues use auto-deleveraging, forcibly closing profitable traders on the other side. Well-run venues almost never reach that stage.

Insurance funds are a solvency signal

The insurance fund grows every time a liquidation closes better than the bankruptcy price, and shrinks when it must cover a shortfall. A large, growing fund means the engine liquidates cleanly. A fund that drains during volatility tells you the venue's risk engine or book depth is failing. Serious venues publish the balance daily.

This is where engine quality separates exchanges. Binance runs the deepest futures books, which keeps liquidations orderly. Bybit built a top-tier perpetuals engine, though it cannot onboard US, UK, Canada or France customers. OKX combines solid depth with a best-in-class terminal. On fees, Phemex lists a 0.06% taker rate, among the lowest in derivatives.

What we tell people before their first perp trade

Trade small, use isolated margin, and set the stop before you set the entry. At 20x leverage a 5% adverse move wipes the margin, and 5% days are ordinary in crypto. Most retail leverage traders lose money. The venues know it, the leaderboards hide it, and the funding you pay while hoping is pure cost.

Perps are a precise tool for shorting, hedging and short-horizon trades. They are a terrible savings account. If your plan is measured in months, buy spot and let the leveraged crowd pay each other funding without you.

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