♾️Perpetual Future

Perpetual futures trading is literally futures trading without expiration and is mainly used in the cryptocurrency market, but is also used in commodity and index trading.

Perpetual futures trading is a type of derivative that allows traders to profit or lose based on movements in the price of the underlying asset without directly owning the asset. Unlike existing futures contracts, which have fixed expiration dates and settlement prices, perpetual futures trading has no expiration date and is continuously adjusted through a structure called funding rate or funding fee.

The derivatives market is a market in which rights that can be exercised when certain conditions are met or a specific point in the future arrives are traded. In this case, the right is the right to buy or sell a specific asset at a certain price, and the right can be exercised by purchasing the right.

Although there are various aspects surrounding derivatives, they were originally designed to properly manage price fluctuation risk. As a means of managing price fluctuation risk, derivative contracts can be confirmed in detail through the example below.

Derivatives example - (1) Rice

There is a farmer who grows rice. This farmer works hard and sells the rice he harvests to make a living. When a farmer starts farming, the price of rice is 2,500 won per kg. On average, this farmer produces 10 tons (10,000 kg) of rice in one year of farming, so the farmer's expected profit at this point is 25 million won.

Let's say the weather was so good during the farming process that all the farmers harvested more rice than expected. As a result, the farmer's harvest reached 12 tons (12,000 kg), but the price of rice fell to 1,500 won per kg. The farmer ended up making a profit of 18 million won, which was far less than expected.

The following year, the farmer decided that he wanted to sell the rice at a fixed price at the time of harvest. This is because no one can know whether rice prices will fall or rise further in the future. At this point, derivative contracts arise.

A wholesaler comes to the farmer and makes a contract saying, “I will buy 10 tons of rice for 22 million won at harvest time.” Although we do not know what the actual price of rice will be at that time, farmers can now determine the future price.

As time passed again and it was time to harvest, the farmer looked up the price of rice and found that rice was being traded at 2,100 won per kg. The farmer had already signed a contract with a wholesaler in the past to sell 10,000 kg for 22 million won, so he could hedge against the risk of falling rice prices.

Derivatives example - (2) ETH Staking

Ethereum is one of the largest blockchain networks and is a representative mainnet that adopts PoS (Proof of Stake) as its consensus algorithm. In order to contribute to the security of the Ethereum mainnet, anyone must deposit 32 of their Ethereum (ETH) and receive ETH as a reward for participating in this process.

Let's say a user wants to contribute to the security of Ethereum, but does not want to be exposed to ETH price fluctuations. Holding 32 ETH means purchasing 32 ETH, so you will profit if the price of ETH rises and lose if the price of ETH falls.

Therefore, this user shorted 32 ETH through perpetual futures trading to prevent losses from fluctuations in the price of ETH. As a result, regardless of whether the price of ETH rises or falls until both the Ethereum staking and the short position are closed, the user will not incur any profits or losses. They can solely enjoy the improved security of the Ethereum network and the associated rewards.

Conclusion

We were able to learn about derivatives through examples (1) and (2) so far. The difference between (1) and (2) is whether there is a time to exercise the right when the transaction is first concluded. In (1) case, the time of ‘harvest time’ is clearly revealed, but in (2) case, short selling can end the transaction at any time the user wants, so the timing of exercising the right is unclear. Since there is no set deadline for exercising rights, this is called ‘Perpetual Futures Trading’. Although there is no set deadline, the original purpose of derivatives, which is to appropriately manage the risk of price fluctuations, is still efficiently achieved in perpetual futures trading.