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Perpetual futures, explained

135 points by sirodoht

by Animats

10 subcomments

It's striking how much the crypto world depends on trust in other parties. The whole point of crypto was supposed to be that it was "trustless". But it's not set up that way. All these crypto derivatives are not set up as contracts on a blockchain, with assets locked up until the derivatives settle. They're book entries with some weakly regulated exchange in Outer Nowhere.

by jhancock

1 subcomments

I spent a few years leading dev on decentralized exchanges, building bridges to other chains and building a sophisticated margin system on top of the trading pools.
A few things I think I've learned:
In its current state, most retail investors are simply supplying to the sophisticated investor.
Although some DeFi projects make a genuine effort to provide analysis tools to level the playing field, it's not nearly enough.
The safest least volatile yields in DeFi are lending your stable coins into a system such as aave. The yield is not far from a high yield USD savings account.
Exchanges such as Uniswap may be the most important legit tool in DeFi. The biggest problem is the liquidity provider's ability to protect their downside...so the investor adds on more sophisticated monitoring/hedging schemes. This gets us back to the retail investor being at a severe disadvantage.

by HWR_14

9 subcomments

Why would I want a perp on BTC when I can just buy the coin? The example quoted the price of the perp as (close to) the same as the price of BTC, so if I'm not getting leverage why not just buy the coin and avoid counterparty risk?

by noname123

2 subcomments

>The basis trade, classically executed, is delta neutral: one isn’t exposed to the underlying itself. You don’t need any belief in Bitcoin’s future adoption story, fundamentals, market sentiment, halvings, none of that. You’re getting paid to provide the gambling environment, including a really important feature: the perp price needs to stay reasonably close to the spot price, close enough to continue attracting people who want to gamble. You are also renting access to your capital for leverage.
Patrick is largely correct on perp futures being mostly used as a leverage instrument to gamble on bitcoin or ether by retail. However I think he's missing one point which is that actually some institutional players also use CME futures to gain exposure to Bitcoin (e.g., BITO ETF or a pension fund that wants to gain exposure to crypto and have a fiduciary duty to hold assets with AAA custodians).
The thesis being that if you're an institution, you don't trust the relatively "fly-by" offshore crypto or even US-regulated custodians of crypto. When you trade CME bitcoin futures, your settlement is guaranteed by the clearing entities of Chicago Mercantile Exchange which are bulge bracket firms of TradFi. So why CME futures largely reflect a premium over the spot BTC price - and this premium is a function of the demand of bitcoin at anytime and the Fed fund rate. As the bitcoin futures market is highly efficient, the CME futures premium is arbitraged across the various DeFi and CeFi exchanges with basis points added relative to the default risk of each venue.
And the basis trade itself is not a "risk-free" arbitrage. The seller on the other side of gamblers are exposed to "right-tail" risk - your premium you get paid to "carry" the bitcoin is fixed while the collateral you must hold in theory to "hold" the coin on behalf of the buyer could be in theory infinite if bitcoin skyrockets to infinity. Sell too much and you might not have enough collateral before the futures settlement happens (for a fixed term futures, not perps) kind of like a reverse but still deadly scenario with Silicon Valley Bank (i.e., you incur "paper loss" that goes away if you can hold it to expiry; but you get force liquidated before then).

by hippich

0 subcomment

It appears to me that majority of the article is about (unregulated) leveraged trading, with perps being an instrument to get leverage. I seen similar stories of blowing up outside us in forex market, for example, where no one were talking about futures, it was just 100x leverage that was biting many (most?) traders.

by trhway

0 subcomment

>In cases where management deems paying winners from the insurance fund would be too costly and/or impossible, they automatically deleverage some winners.
that's deep, in all senses.

by max_

2 subcomments

Is there a good resource on how perps actually work? i.e a technical specification on how to implement them?

by renewiltord

0 subcomment

Only missing the bit about the insurance fund and so on.

by spir

3 subcomments

I don't think many people on HN realize how globally systemically important public blockchains are on track to become, especially Ethereum.
The understandable hatred of the casino and many scams has blinded most of HN as to the true potential of the technology and its associated new public institutions.
That's what a decentralized public blockchain is, a new kind of public institution.
One small example of this is that the most state-of-the-art perpetual futures market in the world is an Ethereum Layer 2 named Lighter https://app.lighter.xyz/markets/

by barfoure

0 subcomment

Sad to see patio11 fell victim to Mammon. The great beast tempts us all.

by frankest

2 subcomments

Crypto at this point is neither decentralized nor anonymous. It’s a Ponzi scheme wrapped in increasing level of complexity and involving an increasing number of banks, and controlled by a decreasing number of very large players. This crypto octopus is putting tentacles in Fidelity, and major US banks, and pension funds, and 401k accounts, and any other money holder. They are putting debt on banks at leverage levels beyond any reason. So when the music stops playing the octopus can slurp the real money liquidity out of as many US banks and savings institutions as possible, to eventually collapse the savings even of people who have nothing to do with Crypto.