A perpetual futures contract is a derivative that tracks the price of an underlying asset with no expiry date, held in line with spot by a funding payment exchanged between long and short holders at regular intervals. A position is opened by posting margin, which allows exposure larger than the collateral committed. Its value is tracked against a mark price derived from spot markets rather than the contract's own last traded price, and if losses erode the collateral below a maintenance threshold, the position is closed automatically.
Four mechanisms do all the work: the pricing system, the margin system, the funding mechanism and the liquidation engine. This article takes them in the order a position actually encounters them.
The Three Prices a Perpetual Contract Tracks
Most confusion about perpetual futures comes from not realising that three different prices are in play at once, each doing a different job.
| Price | What it is | What it is used for |
|---|---|---|
| Last traded price | The price of the most recent trade on that contract | Showing what the market just did |
| Index price | A volume-weighted average of the asset's price across major spot exchanges | Anchoring the contract to the wider market |
| Mark price | The venue's fair-value estimate, built from the index price plus a funding or basis adjustment | Margin, unrealised profit and loss, funding and liquidation |
The mark price is the one that matters. It determines what a position is worth, what is owed at funding, and whether a position gets liquidated.
Why Mark Price Exists
A perpetual contract trades on its own order book, which can be thin. If liquidations were triggered by the last traded price, a single large order could push that book far from the real market for a few seconds and liquidate positions that were never actually underwater — and whoever pushed it would profit from the liquidations they caused.
The mark price removes that incentive. Because it is built primarily from spot prices across multiple venues, a brief dislocation on one contract's order book barely moves it. A common construction takes the median of three candidates: the index price adjusted for funding, the index price plus a short-term basis average, and the last traded price. Taking the median means a single distorted input cannot dominate.
The practical consequence: a wick on the chart that touches your liquidation level does not necessarily liquidate you. What matters is whether the mark price got there.
Opening a Position: Margin and Leverage
Opening a perpetual position means posting collateral — margin — against a position notionally much larger.
Initial Margin vs Maintenance Margin
- Initial margin is what must be posted to open the position. At 10× leverage, a $100,000 position requires $10,000.
- Maintenance margin is the minimum equity required to keep it open. It is a smaller figure, set as a percentage of notional that typically rises with position size.
The distance between current equity and the maintenance requirement is the position's entire margin of safety. Leverage determines how wide that distance is: higher leverage means a smaller adverse move consumes it. This is the single most consequential choice made when opening a position, and it is made before anything else happens.
One point that catches people out: funding is charged on notional size, not on margin. The 10× position above pays funding on $100,000, not $10,000. We cover that calculation in how the funding fee works.
Isolated and Cross Margin
Most venues offer two collateral modes.
- Isolated margin ring-fences a specific amount of collateral to one position. If it is liquidated, the loss is capped at that allocation — and the rest of the account is untouched.
- Cross margin pools the account's whole balance as collateral for all positions. A position can draw on the full balance to survive an adverse move, which makes liquidation less likely for any single position but puts the entire account at risk if things go badly.
Neither is safer in the abstract. Isolated caps the damage per position; cross reduces the chance of damage but widens its potential scope.
What Happens Every Eight Hours
At each funding settlement — commonly 00:00, 08:00 and 16:00 UTC, though intervals vary by venue — the funding rate is applied to every open position.
If the rate is positive, longs pay shorts. If negative, shorts pay longs. The payment is calculated on notional position value and settles directly between traders; the venue facilitates rather than collects it. Only positions open at the timestamp are affected, so a position opened and closed between settlements pays nothing and receives nothing.
This is the mechanism that replaces expiry. A dated futures contract converges to spot because settlement is coming. A perpetual has no settlement date, so it uses a recurring payment to make the expensive side of the contract costly to hold and the cheap side profitable — and positioning adjusts until the gap closes. Why that structural difference matters is set out in perpetual futures vs traditional futures, and the exchange-side formula is published in Binance's funding rate documentation.
Academic work on perpetual pricing reaches the same conclusion from first principles: the funding payment approximates the average futures–spot spread over the preceding interval, which is what tethers a contract with no expiry to its underlying. A study of perpetual futures and no-arbitrage pricing documents both the mechanism and the size of the deviations it fails to close.
How Liquidation Actually Works
Liquidation is the forced closure of a position when equity falls below the maintenance margin requirement. It is automatic, and on most venues there is no margin call window in the traditional sense — the engine acts when the threshold is crossed.
Liquidation Price and Bankruptcy Price
Two distinct levels sit below an open position.
- Liquidation price is where the mark price triggers the engine to begin closing the position. Equity has fallen to the maintenance margin requirement.
- Bankruptcy price is where the posted margin is fully consumed — equity reaches zero.
The gap between them exists on purpose. The engine starts closing at the liquidation price so that, in a functioning market, the position is closed before it becomes bankrupt. If it closes better than the bankruptcy price, the remainder goes to the insurance fund. Some venues also liquidate in stages, closing part of a position to restore the margin ratio rather than taking all of it.
The Insurance Fund and Auto-Deleveraging
Markets do not always cooperate. In a fast move, a position may be closed worse than its bankruptcy price, leaving a shortfall — a trader has lost more than they posted.
The insurance fund covers that gap. It is built from the surplus captured when positions are closed better than bankruptcy, plus liquidation fees, and it exists so that winning traders on the other side can be paid in full.
If a dislocation is severe enough to exhaust the fund, venues fall back on auto-deleveraging (ADL) — forcibly closing the positions of profitable traders on the opposite side to absorb the remaining bad debt, ranked so that the highest-profit, highest-leverage accounts are deleveraged first. ADL is a last resort and rare in normal conditions, but it is a real exposure: it means a correctly positioned, profitable trade can be closed without the holder choosing to close it.
One Position, Start to Finish
| Stage | What happens |
|---|---|
| Open | Post initial margin; choose leverage and margin mode. Notional exposure is set |
| Held | Unrealised P&L marked continuously against the mark price, not the last traded price |
| Each settlement | Funding applied to notional — paid or received depending on the rate's sign and the side held |
| Adverse move | Equity falls toward maintenance margin; margin ratio deteriorates |
| Threshold breached | Liquidation engine closes the position, in full or in stages |
| Shortfall | Insurance fund absorbs any deficit below bankruptcy price |
| Extreme stress | ADL closes profitable opposing positions if the fund is exhausted |
| Close | Position closed manually at any time; funding stops accruing immediately |
The Same Machinery, Used Differently
Everything above describes machinery, not a strategy. The same mechanisms serve completely different purposes depending on how they are used.
A directional trader uses leverage to amplify a view on price, which makes liquidation the central risk and funding a holding cost that erodes the position three times a day.
A market-neutral desk uses the same contract with the opposite intent. Holding the asset in spot and an offsetting short in the perpetual cancels the directional exposure, so price movement is not the source of return — the funding payment is. In that configuration, leverage is not used to amplify a view but kept low deliberately, because its only job is capital efficiency on the hedge, and the dominant risks shift from "will price move against me" to collateral sufficiency, rate inversion and venue exposure. That construction is set out in our delta-neutral strategy overview and in full in our guide to funding rate arbitrage.
Same instrument, same funding settlements, same liquidation engine — used to take risk in one case and to avoid it in the other.
Frequently Asked Questions
Do perpetual futures expire?
No. A perpetual contract has no settlement date and can be held indefinitely provided margin requirements are met. It ends when the holder closes it or when it is liquidated.
What price triggers liquidation?
The mark price, not the last traded price. Mark price is built primarily from spot prices across multiple exchanges, so a brief spike on a single contract's order book does not usually move it enough to trigger liquidation.
Does higher leverage change the funding fee?
Not the rate, but it changes the amount paid. Funding is charged on notional position size, so a position opened at higher leverage on the same collateral carries larger notional and therefore a larger funding payment in absolute terms.
What is the difference between index price and mark price?
Index price is a volume-weighted average of the asset's spot price across major exchanges. Mark price is the venue's fair-value estimate for the contract, built from the index price plus a funding or basis adjustment. The index anchors to the wider market; the mark price is what the venue uses for margin, P&L, funding and liquidation.
Can you lose more than your margin?
On most major venues the combination of liquidation before bankruptcy price, the insurance fund and negative balance protections is designed to prevent it. In extreme dislocations those mechanisms can be strained, which is when auto-deleveraging appears. Protections differ by venue and should be read per contract.
Where to See It Running
Mechanics are easier to follow against live numbers. Current funding rates across the major perpetual markets, and the contracts they apply to, are on our live markets page, and the terms used above are defined in our glossary.
The summary worth keeping: a perpetual futures position is priced off an index rather than its own order book, margined against a maintenance threshold, settled with the other side of the market every few hours, and closed automatically if its collateral runs out. Four mechanisms, each with a specific job. Understanding which price does what is most of the battle.
This article is published for informational purposes and does not constitute investment advice or an offer to transact. Perpetual futures are leveraged instruments and positions can be closed automatically with loss of posted collateral. Leverage increases both exposure and funding costs. Mechanisms described vary by venue and contract. Capital is at risk.
This article is for information only and is not investment advice. Past performance does not guarantee future results.
