Hi everyone, in this article we will take a closer look at the concept of perpetual futures and help you understand what Storm Trade users are trading⚡️
Storm is the first DEX for trading futures on TON. While many futures protocols have already gained their audience and are breaking all TVL records, the market still needs such tools. Trading, risk hedging, arbitrage, all this can be accomplished with perpetual futures.
So, what is it?
A perpetual futures contract, also known as an perpetual swap, is an agreement to buy or sell an asset at an unspecified point in the future. Whoa, whoa, already complicated. Let's break it down.
An agreement to buy or sell means that the user is free to choose to open a long or short position. At an indefinite point in the future is not a specific date, it is the absence of an expiration date, which is why contracts are called perpetual.
Perpetual futures are cash-settled and differ from regular futures in that they have no predetermined execution date and therefore can be held indefinitely without having to re-create the contract as it expires.
Let's look at the basic concepts that describe perpetual futures.
Expiration date
Classic futures contracts allow you to buy or sell the underlying asset at a predetermined price before a certain date. Simply put, they have a limited expiration date.
Perpetual futures, on the other hand, have no expiration date. Therefore, users do not need to keep track of the time of their execution. For example, a trader can hold a long position for as long as he wants until it is liquidated or closed by the trader.
Margin (collateral)
Margin or position collateral is the minimum amount a trader must pay to open a position. For example, a trader can open a 1 BTC position with 0.1 BTC margin and x10 leverage. Thus, margin is what supports the trader's position by acting as collateral.
Liquidation
If the price of the Asset, on which the position is opened, goes in the opposite direction and reaches the liquidation price, the trader's position can be partially or completely liquidated. If the trader is liquidated, the deposited collateral may be partially or fully withdrawn from the trader. The higher the leverage used, the higher the trader's chance of being liquidated.
Storm Trade has a partial liquidation mechanism, where a position is not liquidated in its entirety, but partially, allowing the user to take the necessary action.
Market Price and Index Price
Market Price on Storm is determined based on the number and volume of traders' open positions, while Index Price reflects the actual market price of the asset.
The price of perpetual contracts (Market Price) often diverges from the broader market (Index Price). These divergences signal sentiment on the exchange - if most traders expect the underlying asset to increase in value over time, the Market Price (MP) is likely to exceed the Index Price (IP). Similarly, if most traders expect the price to fall, the Market Price will be lower than the Index Price.
There are several mechanisms that curb this process and keep the Market Price of the perpetual contract close to the Index Price. Funding payments and arbitrage are one of them.
Funding
Every hour traders with opened long and short positions pay each other funding depends on the market conditions. If MP > IP, longers pay to shorters. If MP < IP, shorters pay to longers.
The size of the funding paid depends on the difference between Market Price and Index Price, as well as the size of the trader's position. This incentivizes traders to take the unpopular side of the market.
In addition, the size of leverage used, which can have a big impact on the PnL, is also taken into account when calculating funding.
As a rule, the higher the difference between IP and MP, the more money a trader will pay when opening a divergent position, and the more money a trader will receive when opening a convergent position.
Arbitrage
Arbitrage helps traders to make money on the difference between prices both on different venues and within the same venue. There are countless arbitrage options that are limited only by traders' imaginations. Let's take a look at a few of them.
Spread Arbitrage
Spread arbitrage is one of the most popular hedging strategies that utilizes the difference between Index Price and Market Price to make a profit.
If the Market Price differs significantly from the Index Price on other exchanges, arbitrageurs can benefit in two ways:
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If a trader already has a position open on another exchange, they can use Storm Trade to take a reverse position and capitalize on funder payouts;
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If a trader expects Market Price to tend to revert to Index Price, they can buy or sell the same asset elsewhere and establish a long or short position on that asset using Storm.
Funding Arbitrage
Funding arbitrage helps traders to make a profit thanks to the difference between the volume of open interest in long and short positions. For example, when the market is flat and a large number of positions are open in one direction at the same time, it is enough to open a position in the opposite direction to earn on the fundings payments from the other side.
PnL
PnL (profit and loss) is a kind of profit and loss statement of a trader, which can be realized and unrealized. When a position is open, the PnL is unrealized, which means that it still changes with any market movement. When a position is closed, the unrealized PnL becomes realized (partially or fully).
Since realized PnL reflects the trader's profit or loss, it does not affect MP or IP, but only the order execution price.
I think that's enough internet for today... We've covered the basic fundamentals of being a futures trader. If you find it challenging, that's fine. If you have difficulty with something, it means development of yourself is going on. Refer to our other articles to immerse yourself in the world of Storm.
Thank you for reading! 🚀