Stacked Markets
What are perpetual futures? The definitive on-chain trading guide
Published May 28, 2026 · By Stacked Markets Research Team
Contents
- Key stats
- How perps differ from traditional futures
- How the funding rate works
- Mark price, index price, and last price
- Margin types: isolated vs cross
- How liquidation actually works
- Leverage explained with real numbers
- On-chain perps vs CEX perps
- Risks traders consistently underestimate
- FAQs
Perpetual futures are the most traded instrument in crypto by a significant margin. They account for the majority of volume across both centralised and decentralised venues — yet plenty of traders who use them daily have a fuzzy grasp of the mechanics that determine whether they get filled, funded, or liquidated. That gap costs money.
This guide covers the full mechanics: how perps are structured, how funding rates are calculated, what mark price actually does, how liquidation unfolds step by step, and where on-chain execution differs from trading on a CEX. If you already trade perps, the goal is to sharpen what you know, not introduce you to the concept.
Key stats
- Perpetual futures account for the majority of global crypto derivatives volume, which reached approximately $3.4 trillion in monthly notional in early 2026 across major venues (CoinGecko Derivatives report, Q1 2026).
- Hyperliquid is the largest on-chain perpetual DEX by open interest, with over $8 billion in open interest recorded in 2026 (Hyperliquid public dashboard).
- dYdX has processed over $1.5 trillion in lifetime volume across its protocol versions (dYdX Foundation).
- Funding rates on BTC perpetuals have historically ranged from near zero in flat markets to annualised rates exceeding 100% during strong directional moves (Coinglass historical data).
- Liquidations across major CEX and DEX venues have exceeded $1 billion in a single 24-hour period during high-volatility events (Coinglass).
How perps differ from traditional futures
A traditional futures contract has an expiry date. You agree to buy or sell an asset at a fixed price on a specific date, and when that date arrives, the contract settles — either in cash or by delivery of the underlying. Traders who want continued exposure have to roll into the next contract, paying the spread each time.
Perpetual futures remove the expiry entirely. No settlement date. You hold the position as long as you choose, provided your margin stays above the maintenance threshold. For active traders who want directional exposure without managing roll schedules, that is a meaningful practical difference.
The trade-off is that without an expiry to anchor the contract price to spot, the market needs another mechanism to keep the two aligned. That mechanism is the funding rate.
Traditional futures trade at a premium or discount to spot depending on interest rates, carry costs, and market sentiment — a relationship called the basis. Perps replicate this dynamically through continuous funding payments rather than a fixed basis baked into the contract price at inception.
How the funding rate works
The funding rate keeps a perpetual futures price tethered to the underlying spot price. Without it, a heavily long-biased market could push the perp price far above spot indefinitely. Funding corrects that drift by transferring money between longs and shorts at regular intervals.
How funding is calculated
The funding rate is derived from the premium — the difference between the perpetual's mark price and the spot index price. Most venues also incorporate an interest rate component, typically a small fixed value representing the cost of holding a leveraged position.
The general formula:
Funding Rate = Premium Index + Clamp(Interest Rate − Premium Index, −0.05%, 0.05%)
The clamp limits how far the interest rate component can pull the funding rate away from the premium. In practice, when the perp is trading significantly above spot, the premium dominates and the funding rate is positive. When the perp trades below spot, it turns negative.
Hyperliquid calculates funding every hour using a time-weighted average of the premium over the funding period. The exact methodology is published in Hyperliquid's documentation. Different venues use different intervals — some every 8 hours, others every hour — so the annualised rate for the same nominal funding figure will look very different depending on which interval you're reading.
Who pays, who receives, and when
When the funding rate is positive, longs pay shorts. When it's negative, shorts pay longs. The payment is proportional to your notional position size, not your margin.
If BTC is at $100,000 and you hold a 1 BTC long with a funding rate of 0.01% per hour, you pay $10 per hour to short holders. Over 8 hours, that's $80. Over 24 hours, $240. In a sustained bull market with funding running at 0.05% per hour, the annualised cost of holding that position exceeds 400% of notional. Funding is not a rounding error during trend periods.
One more thing worth stating clearly: funding does not come from the exchange. It transfers directly between traders on opposite sides. The venue takes no cut.
Mark price, index price, and last price
These three prices are not the same thing. Conflating them is one of the most common sources of confusion about how liquidations and PnL actually work.
Last price is the price of the most recent trade that executed on the venue. It can be moved by a single large order on a thin book. It is the least reliable reference for margin calculations precisely because it is easy to manipulate in low-liquidity conditions.
Index price is a composite of spot prices from multiple external sources, typically weighted by volume. It represents what the underlying asset is actually worth in the broader market. Hyperliquid publishes its index price sources for each market. The index price anchors the funding rate calculation.
Mark price is a calculated value designed to represent the fair value of the perpetual contract — typically the index price plus a decaying average of the premium. Mark price is what venues use to calculate your unrealised PnL and, critically, whether your position is approaching liquidation.
Why does this matter? Your position will be liquidated based on mark price, not last price. If a large order pushes last price down sharply on a thin book, your margin calculation does not move with it — as long as mark price holds. This protects you from manipulation-driven liquidations. The flip side: if mark price diverges significantly from last price, your displayed PnL may not reflect what you'd actually realise closing at the current order book.
Margin types: isolated vs cross
Most perpetual futures venues offer two margin modes. If you are running multiple positions simultaneously, understanding the difference is not optional.
Isolated margin allocates a fixed amount of collateral to a single position. If that position is liquidated, the loss is capped at the isolated margin you assigned. Your other positions and remaining account balance are unaffected. Isolated margin is the right choice when you want hard position-level risk limits.
Cross margin uses your entire available account balance as collateral across all open positions. A profitable long can effectively subsidise a losing short, giving each position more room before liquidation. The risk is that a single large adverse move can drain the shared pool and trigger cascading liquidations across everything you have open simultaneously.
Neither mode is universally better. Isolated margin gives you a predictable maximum loss per trade. Cross margin gives you more capital efficiency but exposes your full balance to correlated drawdowns. The right choice depends on your position structure and how you manage risk across instruments.
How liquidation actually works
Liquidation is not a single event that happens at one specific price. It is a process with several thresholds, and understanding each one changes how you manage margin.
Step 1: Maintenance margin threshold. Every position has a maintenance margin requirement — the minimum collateral needed to keep it open. This is expressed as a percentage of notional position size and varies by venue and leverage tier. On Hyperliquid, maintenance margin requirements are published per market.
Step 2: Mark price hits the liquidation price. When mark price moves against your position to the point where your remaining margin falls to or below the maintenance margin requirement, your position enters the liquidation process. The liquidation price is calculable in advance — it is not a surprise if you know your entry, your margin, and the maintenance requirement.
Step 3: The liquidation engine takes over. On Hyperliquid, the liquidation engine attempts to close the position at mark price. If the position cannot be closed without exceeding the insurance fund, the protocol's backstop mechanisms activate.
Step 4: Insurance fund and socialised loss. Most perpetual venues maintain an insurance fund to absorb the gap between the liquidation price and the actual fill price when conditions are adverse. If the insurance fund is depleted, some venues socialise the loss across profitable traders — a mechanism called auto-deleveraging (ADL). Hyperliquid uses ADL as the final backstop: the most profitable traders on the opposite side of a losing position may have their positions partially closed to cover the gap.
The practical implication: do not set your stop-loss at your liquidation price. By the time liquidation triggers, slippage, funding, and fees have already eroded your margin. A stop well above liquidation is not timidity — it is position management.
Leverage explained with real numbers
Leverage on a perpetual future means you control a notional position larger than your deposited margin. Here is a concrete example.
You deposit $1,000 USDC as margin and open a BTC-USDC perpetual long at 10x. Your notional position size is $10,000. BTC is priced at $100,000, so you are long 0.1 BTC.
BTC rises 5% to $105,000. Your position is now worth $10,500. Your profit is $500 — a 50% return on $1,000 margin.
Now reverse it. BTC falls 5% to $95,000. Your position is worth $9,500. Your loss is $500 — 50% of your margin gone on a 5% move in the underlying.
At 10x, a 10% adverse move wipes your entire margin before maintenance margin requirements trigger liquidation slightly earlier. At 20x, a 5% move does the same.
The math is straightforward. What traders consistently underestimate is the compounding effect of funding costs on top of a losing position. If you are long during a period of elevated positive funding and the market moves against you, you are paying funding on a position that is simultaneously losing mark-to-market. Both forces drain your margin at once.
On-chain perps vs CEX perps
The structural difference between trading perpetuals on a centralised exchange and trading them on-chain goes beyond custody. It affects execution, transparency, and what you can actually verify.
On a CEX, you deposit funds into the exchange's custody. The matching engine is a black box. You trust that your order was filled at the stated price, that the liquidation engine behaved correctly, and that the exchange is solvent. The FTX collapse in 2022 is the clearest demonstration of what happens when that trust is misplaced. Billions in trader funds were lost because the exchange was using customer deposits as collateral for its own trading book.
On-chain perps settle on a public ledger. Every order, fill, funding payment, and liquidation is verifiable. You do not need to trust the venue's solvency because your collateral is not held by the venue — it is held in a smart contract or, on non-custodial terminals like Stacked Markets, never leaves your wallet in the first place.
The historical trade-off was execution quality. On-chain order books suffered from latency, thin liquidity, and front-running via MEV. That gap has narrowed substantially.
Hyperliquid as the leading on-chain order book
Hyperliquid operates a fully on-chain central limit order book with sub-second block times, running on its own L1 purpose-built for high-throughput trading. It is the largest on-chain perpetual DEX by open interest as of 2026, with over $8 billion in OI on record. Maker and taker fees are tiered by volume, and the fee structure is published.
For experienced traders, the key point is this: Hyperliquid's order book depth and execution quality are competitive with mid-tier CEX venues for most major markets. The argument that on-chain means worse fills no longer holds for Hyperliquid's core markets. You are not sacrificing meaningful execution quality for on-chain settlement.
Stacked Markets is a non-custodial trading terminal built directly on top of Hyperliquid's order book. You sign orders with your wallet. Hyperliquid handles matching, margin, funding, and settlement. Stacked Markets holds no funds and no keys — verifiable on-chain at any time. The terminal adds configurable leverage caps, notional position limits, circuit breakers, and slippage controls that Hyperliquid's native UI does not provide, in a unified layout combining a live order book, chart, position tracker, and order ticket.
Risks traders consistently underestimate
You already know that amplified positions amplify losses. Here are the risks that experienced traders still get caught by.
Funding rate drift during trend periods. Positive funding in a bull market feels like background noise until it compounds. A sustained 0.05% hourly funding rate on a large long position costs more than most traders calculate before entering. Model the funding cost explicitly before sizing.
Mark price divergence during low liquidity. In thin markets or during sharp moves, mark price and last price can diverge meaningfully. Your unrealised PnL is calculated on mark price. If you close at last price during a divergence, the actual fill may be worse than your terminal shows.
Cascading liquidations from cross margin. Traders running cross margin across multiple correlated positions — long BTC and long ETH simultaneously, for example — face correlated drawdown risk. A broad market sell-off can drain the shared margin pool faster than any single position's liquidation price would suggest.
ADL risk on profitable positions. If you are significantly in profit during a high-volatility event that triggers mass liquidations, auto-deleveraging can partially close your position at mark price without your input. This is the protocol's backstop mechanism, not a bug. It is rare but not impossible, particularly in illiquid markets or during extreme volatility.
Slippage on market orders. Many venues label orders as market orders but execute them as limit orders with wide, undisclosed slippage tolerance. The worst-case fill is often not shown before submission. On Stacked Markets, every order uses IOC limit orders with explicit slippage bounds, and the worst-case fill price is always displayed before the wallet signing prompt appears. That is the correct way to handle execution transparency — and it is not the default on most venues.
Overconfidence after a winning streak. Not a mechanic, but consistently the most damaging risk factor. A run of profitable trades in a trending market can produce a false sense of edge. When the regime shifts — funding flips, volatility spikes, liquidity thins — position sizes that felt comfortable become untenable fast.
FAQs
- What is a perpetual future in simple terms?
A perpetual future is a derivative contract that lets you speculate on the price of an asset without owning it, with no expiry date. You can hold the position indefinitely as long as your margin stays above the maintenance threshold. A funding rate mechanism keeps the contract price anchored to the underlying spot price.
- How is the funding rate calculated on Hyperliquid?
Hyperliquid calculates funding every hour using a time-weighted average of the premium between the perpetual's mark price and the spot index price, combined with a small interest rate component. When the perp trades above spot, longs pay shorts. When it trades below spot, shorts pay longs. The exact methodology is published in Hyperliquid's documentation.
- What is the difference between mark price and last price?
Last price is the price of the most recent trade on the venue. Mark price is a calculated fair value derived from the spot index price plus a decaying premium average. Your unrealised PnL and liquidation threshold are based on mark price, not last price. This prevents a single large order on a thin book from triggering manipulation-driven liquidations.
- What happens when you get liquidated on a perpetual futures position?
When mark price moves against your position to the point where your remaining margin falls to or below the maintenance margin requirement, the liquidation engine closes your position. Any margin above the maintenance threshold may be returned, minus fees. If the position cannot be closed without a loss exceeding the insurance fund, the protocol's auto-deleveraging mechanism may partially close profitable positions on the opposite side to cover the gap.
- What is the difference between isolated and cross margin?
Isolated margin allocates a fixed amount of collateral to a single position — your maximum loss is capped at that amount. Cross margin uses your entire account balance as shared collateral across all open positions, giving each position more room before liquidation but exposing your full balance to correlated losses.
- Why trade perps on-chain instead of a CEX?
On a CEX, your funds are in the exchange's custody. On-chain perps settle on a public ledger, and your collateral is held in a smart contract or, on non-custodial terminals, never leaves your wallet. Every fill, funding payment, and liquidation is verifiable. The execution quality gap has narrowed substantially on Hyperliquid, which runs a fully on-chain central limit order book with sub-second block times.
- What are IOC limit orders and why do they matter for slippage?
IOC stands for Immediate-Or-Cancel. An IOC limit order executes immediately at the specified price or better and cancels any unfilled portion rather than resting in the book. With explicit slippage bounds, you set a worst-case fill price before submitting — you know exactly how bad the fill can get before you sign. A standard market order fills at whatever the book offers, with no guaranteed worst-case price shown upfront.
The mechanics covered here — funding, mark price, liquidation thresholds, margin modes — are the foundation of every position you take in perpetual futures. Getting them right does not guarantee profitable trades. Getting them wrong guarantees avoidable losses.