Curious about the pricing mechanics behind perpetual contracts?
Let's dive in! 🧵
Perpetual Futures prices are based on the index price (average across all markets), the trading very closely matches the spot price of the asset, though the price may differ in certain volatile market conditions.
It’s important to note that futures contracts are just that: contracts. They’re cash settled, without any exchange of the asset itself.
Perps are just agreements and they are not backed by the asset (example ETH-PERP is not backed by ETH) they are supposed to follow the price of Ethereum.
The Pricing of Perpetuals is driven by an incentive mechanism: Funding Rate
The funding rate is a fee imposed on either long or short positions to encourage the market price of the contract to mirror the spot price of the underlying asset.
When the market is strongly bullish, longs pay shorts (positive funding rate) and when it’s bearish, shorts pay longs (negative funding rate).
On Hubble Exchange, the funding rate will update each hour. Typically, the funding rate is represented in a small %, example: 0.0005% per hour.
