3. Mechanism of perpetuals

Written by the Phezzan team

As perpetual contract is a derivative (a future that never expires), traders don't actually own the underlying asset itself. For example, when buying a BTC-UST contract on Phezzan Protocol, you don't actually own any BTC. Instead, you buy a contract that you can sell later.

What is sepecial about perpetual contract is the price of contract (called mark price) is approximately the same as spot price (called index price). It uses a mechanism called funding rate to achieve this. Every once in a while, traders will either pay or receive funding payment from each other. If contract price is over the spot price, traders in long position will have to pay those in short position a certain amount determined by funding rate (basically an interest rate). And vice versa. Funding rate drives the contract price towards spot price.

Since perpetual contract price is near the spot price and the contract never expires, buying a perpetual contract is almost like speculating on the price of the underlying asset itself. The difference is you can trade with more leverage with perpetuals.

For Phezzan Protocol testnet, you can trade with up to 10x leverage. Wonder how that is achieved? Topic for another day.