What is a perpetual future? Funding, leverage and liquidation explained
A plain-English explainer of crypto perpetual futures: how funding keeps the price tethered to spot, what leverage really does, and how liquidation works.
Perpetual futures, or "perps", are the most traded instrument in crypto, and also one of the most misunderstood. This is a plain-English explainer of what they are and the three mechanics that matter: funding, leverage, and liquidation.
A future with no expiry
A traditional futures contract has an expiry date. A perpetual does not. You can hold a perp position indefinitely, which is convenient, but it creates a problem: with no expiry to force the contract price back toward the real ("spot") price, the two could drift apart. Funding is the fix.
Funding: the tether to spot
Funding is a small payment exchanged directly between longs and shorts, usually every hour. It is not a fee paid to the exchange.
- When the perp trades above spot (more buyers than sellers), funding is positive, and longs pay shorts. This nudges people to stop buying.
- When the perp trades below spot, funding is negative, and shorts pay longs.
The rate is small per hour but compounds. A rate of 0.01% per hour is roughly 88% annualized, which is enormous. Any strategy that holds positions has to treat funding as a real cost or income stream, not a rounding error. You can see the current funding for every market on the markets page.
Leverage: amplification, not free money
Leverage lets you control a larger position than your collateral. Ten-times leverage means a 1% move in the asset is a 10% move in your position. This cuts both ways, exactly and symmetrically. It amplifies gains and losses equally.
The dangerous misconception is that higher leverage means higher returns. What it actually means is a tighter margin for error. At 20x, a 5% move against you can wipe out the position entirely. Professional desks usually run far less leverage than beginners expect, precisely because survival matters more than any single trade.
Liquidation: the hard floor
If the market moves far enough against a leveraged position, your collateral can no longer cover the loss, and the position is liquidated, force-closed by the venue. You lose the margin posted to that position.
Liquidation is not a bug, it is the mechanism that keeps the whole system solvent. But it is the single most common way leveraged traders blow up. The defenses are simple to state and hard to follow: use a stop-loss, size positions so a normal adverse move cannot liquidate you, and never add margin to a losing trade to avoid a liquidation.
Why this matters for automated trading
An AI proposing trades on perps has to respect all three mechanics: it should account for funding on every hold, keep leverage sane, and always sit behind a mandatory stop so no single position can spiral into liquidation. That is exactly the job of a risk engine, which enforces these rules whether the AI remembers them or not.
The honest summary
Perps are powerful and unforgiving. Funding is a constant cost or income. Leverage amplifies both directions equally. Liquidation is the floor you must never touch. Understand these three, and most of the mystery disappears.
Want to see them live? Browse Hyperliquid markets, or start free on testnet to watch a disciplined engine trade them with fake funds first. Nothing here is financial advice.