Derivatives allow market participants to gain exposure to underlying assets without holding them directly. In traditional finance, this role is primarily fulfilled by standardized futures, forwards, options, and swaps. Crypto markets, however, introduced a new variant: the perpetual future, or “perp.”

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As the name suggests, perpetual futures have no expiry and therefore never settle into the underlying asset. Instead, they rely on a periodic funding rate mechanism to keep the derivative’s price closely aligned with the spot price. Because crypto markets operate 24/7 and settlement is effectively instantaneous, carry in the form of funding payments can flow continuously between long and short positions, with arbitrage ensuring that the perp price tracks the underlying.

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Traditional financial markets, by contrast, are built around fixed settlement dates and centralized clearing infrastructure. Within such a framework, a continuously running perpetual contract would be operationally and regulatorily impractical.

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In this article, we explain why perpetual futures are a crypto-native invention, examine the key market participants, outline the architectural choices that differentiate perp exchanges, and explore how asset managers can integrate perps into on-chain strategies.

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How do Perps work

Funding and Arbitrage

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A perpetual contract mirrors the price of an underlying asset but has no expiry. To keep its price aligned with spot, exchanges use a funding rate mechanism under which small, periodic payments flow between long and short positions.

When the perpetual trades above spot, longs pay shorts. When it trades below spot, shorts pay longs. These funding flows incentivize traders to run arbitrage strategies that anchor the perpetual’s price to the underlying spot market.

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Example
Suppose ETH spot is trading at $3,000 while the ETH perpetual trades at $3,030. The 1% premium implies that longs are paying funding to shorts. Arbitrageurs can short the perpetual and simultaneously buy spot ETH, locking in the 1% spread. As more traders implement this trade, selling pressure on the perpetual and buying pressure on spot push the two prices back into alignment.

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Unlike traditional futures, where carry (such as interest rate differentials) is embedded in a contract that settles on a fixed date, perpetuals express carry continuously. The funding payments observed at regular intervals - often hourly - are effectively real-time carry flows that keep the contract tethered to spot.

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Why Perps do not exist in traditional finance 

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Perpetual futures did not fail to appear in traditional markets because no one conceived of them; they simply do not fit the way traditional finance clears and settles risk.

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Traditional derivatives exchanges rely on centralized clearing systems designed decades ago for contracts with fixed expiries. Every trade is novated to a clearinghouse that nets positions, manages margin, and settles profits and losses on a daily cycle through the banking system. Intraday price movements are recorded for risk management purposes, but no cash actually moves between counterparties until the next settlement window.

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Perpetual futures operate very differently. Their prices are kept close to spot through continuous funding flows between long and short positions. These flows involve real transfers of value that must occur at regular, short intervals to anchor the contract to the underlying. Running such a mechanism on legacy clearing infrastructure would require constant margin recalculation and near-instant collateral transfers across multiple institutions. Clearing systems designed for daily batch settlement cannot support that cadence, and traditional banking rails cannot move collateral in real time.

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In theory, funding payments could be deferred and settled once per day. In practice, this undermines the mechanism that stabilizes perpetuals. If funding is only exchanged at the end of the day, the perpetual price can diverge significantly from spot for extended periods. Arbitrage becomes less effective, volatility increases, and the contract ceases to function as a capital-efficient proxy for the underlying asset.

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Blockchains address this constraint at the infrastructure level. They serve as the clearing layer, enabling margin and funding to be settled directly between traders on a continuous basis. Because settlement is automated and always on, perpetuals can exchange funding as frequently as every hour while remaining tightly aligned with spot prices. In short, perpetual futures depend on continuous clearing—something fundamentally incompatible with the batch-based, regulated settlement architecture of traditional finance.

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Architectures & trust assumptions in Perp exchanges

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Not all crypto perpetuals are traded on the same type of exchange. The differences between perp venues stem from trade-offs across latency, capital efficiency, transparency, and trust. As technology evolves, however, these trade-offs are becoming less rigid and, in some cases, no longer necessary.

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Broadly speaking, perpetual exchanges can be categorized into two models: centralized exchanges (CEXs) and decentralized exchanges (DEXs).

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The CEX model: The Black Box

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Today, most traders access perpetual futures through centralized exchanges such as Binance, Bybit, or OKX. These venues operate across multiple jurisdictions, with varying degrees of regulatory oversight and limited public transparency. Many core functions such as how the matching engine operates, how profit and loss is settled, how assets are custodied, and how margining and liquidations are handled are managed internally. As a result, users largely rely on the exchange’s controls, risk management practices, and disclosures.

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This model is fast and capital-efficient, but often less transparent than on-chain alternatives. The collapse of FTX illustrated how opacity can conceal material risks: internal accounting and leverage were misrepresented, customer assets were commingled, and when withdrawals were halted it became clear that reported balances did not correspond to available assets. In practice, one of the clearest indicators of an exchange’s financial health is its ability to meet withdrawals during periods of stress.

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In crypto, centralized exchanges combine operational centralization with uneven regulatory treatment. Traditional markets are also centralized, but they typically operate under well-defined regulatory frameworks and offload settlement and counterparty risk to independent clearinghouses. In crypto, these safeguards are still evolving. Many venues combine trading, custody, and settlement within a single entity, increasing reliance on the exchange itself. Some platforms are moving toward greater transparency, through proof-of-reserves disclosures or third-party attestations notably, but the rigor and scope of these measures vary significantly.

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The DEX model: The open, verifiable alternative

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Within decentralized exchanges, two main architectural models dominate: central limit order book (CLOB)–based designs and pool-to-trader models.

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Perpetual DEXs reduce custody risk by keeping assets on-chain, but they introduce other risks that are material in practice. Smart contract vulnerabilities and upgrade mechanisms controlled by admin keys can endanger user funds. Pricing depends on external or internal oracles, meaning faulty data, latency, or manipulation can lead to incorrect margining and wrongful liquidations. In addition, transaction ordering is controlled by validators or, in some designs, centralized sequencers, which enables maximal extractable value (MEV) and can negatively impact execution quality.

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CLOB perp DEXs

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CLOB-based perpetual exchanges mirror traditional venues in that users place, modify, and cancel limit orders that are matched in real time. Implementing this model directly on general-purpose blockchains such as Ethereum is impractical, as every order book update would require an on-chain transaction, making it prohibitively expensive for market makers to operate.

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As a result, CLOB-based perp DEXs typically follow one of two approaches: either they build purpose-built blockchains with the exchange logic natively embedded, or they operate as Ethereum appchains (Layer 2s) that execute trades off-chain while proving all state transitions back to Layer 1 using zero-knowledge proofs.

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Hyperliquid, currently the largest perp DEX by trading volume, is an example of the former. It runs on a custom blockchain powered by HyperCore, an on-chain engine that handles order matching, risk management, and liquidations. Operating its own blockchain means that all trades and state transitions are settled under Hyperliquid’s own consensus. While this architecture offers high transparency, it raises questions about consensus security, with critics noting that validation is reportedly handled by a small validator set collocated within a single data center.

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Lighter Exchange exemplifies the latter approach. It operates as an Ethereum appchain that executes trades off-chain while posting zero-knowledge proofs to Ethereum. User deposits remain locked in Ethereum smart contracts, and balances change only through verified state updates. If the Lighter operator were to become unavailable or act maliciously, invalid proofs would fail verification on Ethereum, allowing users to withdraw funds based on the latest valid state.

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This design inherits Ethereum’s consensus and trust guarantees while delivering performance closer to that of centralized exchanges.

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Pool-to-trader perp DEXs

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Pool-to-trader models do not maintain an order book. Instead, traders interact directly with a liquidity pool that takes the opposite side of each trade.

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Pricing in these systems is oracle-based and adjusted through slippage or utilization parameters that reflect the impact of a trade on pool risk. This design is better suited to general-purpose blockchains, which typically cannot support the throughput required for CLOB-based exchanges.

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Prominent examples include GMX (on Arbitrum) and Jupiter (on Solana). Both anchor prices using external oracles, but they differ in how they manage pool risk. In each case, fees are dynamically adjusted to create self-regulating incentives that help keep long and short exposure, as well as liquidity levels, balanced within the pool.

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Integrating Perpetual Futures into Asset Management Strategies

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For on-chain portfolio managers, perpetual futures are more than speculative instruments; they are essential tools for risk management, hedging, and capital efficiency. The main use cases include:

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• Hedging exposure: A fund holding significant spot positions in assets such as ETH or BTC can hedge portfolio exposure efficiently using perpetuals, without needing to unwind the underlying holdings.
  
  
• Arbitrage strategies: Portfolio managers can run delta-neutral strategies to capture funding rates by offsetting spot and perpetual positions.
  
  
• Directional positioning: Perpetuals enable leveraged exposure, allowing managers to express market views with significantly higher capital efficiency than spot-only strategies.
  
  

Executing these strategies effectively requires flexibility—the ability to access multiple venues, custody setups, and execution environments in order to mitigate operational risk while benefiting from the best available pricing and liquidity. Onyx’s modular architecture is designed around this principle. It allows asset managers to execute strategies using the custody solution of their choice and, as a result, access any protocol across any chain. This venue-agnostic approach enables managers to route execution dynamically, diversify risk across infrastructures, and combine centralized and decentralized liquidity within a single coherent strategy framework.

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