You already know, from the last two articles, that a perp lets you take a position on an asset’s price without owning it, in either direction, and that it never expires. That last part, no expiry, is the whole reason the word “perpetual” is in the name. To see why it matters, it helps to look at what perps were built from.
What a traditional futures contract is
A futures contract is an agreement to buy or sell an asset at an agreed price, on an agreed future date. The idea is over a century old, originally used by farmers and buyers to lock in a price months ahead of harvest, so neither side had to gamble on where the market would be by then.
Every traditional futures contract carries that same structure: a fixed settlement date. When it arrives, the contract closes, typically settled with a cash payment covering the difference between the agreed price and the market price at that moment. If a trader wants to keep a position going past that date, they have to close the expiring contract and open a fresh one, a process called rolling, which costs both time and usually money.
If you’ve traded futures before, none of that is new. What’s different here is what happens when that expiry date is removed entirely.
The problem removing expiry creates
An expiry date does more than just end a contract. It’s also what keeps the contract’s price honest. As settlement approaches, a futures contract’s price is forced to converge with the real market price, because that’s the price it will actually settle at. Take away the expiry date, and you take away the thing doing that job. Nothing stops a perpetual contract’s price from simply drifting away from the real market price over time, with no settlement date ever arriving to correct it.
This is the exact problem perpetual futures had to solve before “no expiry” could actually work.
The funding rate is the answer to that problem, not an extra cost
The funding rate exists because something has to replace the job expiry used to do. It’s not a fee bolted onto perps for revenue, it’s the direct consequence of removing the one mechanism that used to keep the price anchored. Take away the expiry date, and you need something else pulling the price back toward reality. Funding is that something.
Here’s how it works. Periodically, a payment is exchanged directly between everyone holding a long position and everyone holding a short position, nothing goes to the platform itself. When the perpetual’s price trades above the real market price, longs pay shorts. That makes holding a long slightly more expensive and holding a short slightly more rewarding, which nudges demand back toward balance. When the perpetual trades below the real price, the payment runs the other way instead.
Say the funding rate for a given period comes out to 0.01%, on a $1,000 position. Whoever’s on the paying side hands over $0.10 at that moment, and whoever’s on the receiving side gets it. Small on its own, but it recurs for as long as a position stays open, which is exactly the trade-off worth understanding if you’re planning to hold a perp position for weeks rather than hours.
Side by side, in practice
A traditional futures contract keeps its price honest through a deadline. A perpetual keeps its price honest through a continuous, ongoing payment between the traders on either side of it. One does the job all at once, at a fixed point in time. The other does the same job constantly, a little at a time, for as long as the contract stays open. Neither is solving a different problem, they’re solving the exact same one, just on different schedules.
That’s the full answer to “why perpetual.” Removing the expiry date wasn’t just a convenience feature, it required building something to take its place, and the funding rate is that something.
Where to go next
Every position you open on a perp is either long or short, and now that you understand what you’re actually holding and why it doesn’t expire, that’s the natural next decision to understand properly.
→ Next: Long vs. Short Positions Explained