The perpetual swap is the most-traded instrument in crypto, and one of the strangest ideas in markets: a futures contract that never expires. That single design choice creates a mechanism — funding — that quietly answers this series' question in real time, every few hours: who's on the other side, and who's paying whom.
This is the fifth piece in our series on how instruments really work.
What a perpetual actually is
A normal future has an expiry date, which forces its price to converge to spot. A perpetual ("perp") has no expiry — so it needs another way to stay tethered to the spot price. That tether is the funding rate.
The everyday version: imagine a futures contract you can hold forever, with a small toll that constantly nudges its price back toward the real one. Whoever is leaning the same way as the crowd pays the toll; whoever leans against it collects.
How funding works
Every few hours (commonly every eight), a payment passes between longs and shorts — not to the exchange, but peer to peer.
When the perp trades above spot (too many eager longs), funding is positive: longs pay shorts. When it trades below spot (too many shorts), funding is negative: shorts pay longs. The payment makes the crowded side a little more expensive to hold, gently pulling the perp back to spot. That's the whole trick.
The surprise for most people: funding isn't a fee to the platform. It's money flowing directly from one trader to another.
What perpetuals are good for
- 24/7 leveraged exposure to crypto, long or short, with one instrument.
- Effortless shorting and hedging of a spot bag.
- Funding harvesting — a delta-neutral trade that collects funding (more below).
- Deep liquidity and price discovery, often deeper than spot.
The other side — who takes your leveraged long
When you open a leveraged long, someone is short the same perp. Often it isn't a bear betting against you at all. It's frequently a basis trader running a delta-neutral position: long spot, short the perp. They don't care which way price goes — they're there to collect the funding you (and the rest of the long crowd) are paying. When funding is persistently positive, this trade is a paid, market-neutral carry, and it's a large part of who is structurally short the perp.
So the honest picture of "the other side" is rarely a mirror-image gambler. It's often a machine harvesting the toll that crowded positioning creates.
And there's a deeper layer when things break. Liquidations don't run on the last traded price — they use a mark price tied to an index, to stop a single venue's wick from triggering them. When a liquidation can't be filled in the market, the exchange's insurance fund steps in. And if that fund is overwhelmed in a violent cascade, the exchange can resort to auto-deleveraging (ADL): it forcibly closes some of the profitable traders on the opposite side to balance the books. That's the most literal "other side" there is — in a crash, your winning short can be auto-closed to cover someone else's blown long.
Where it goes wrong
Funding is a real, recurring cost: hold a long through a long stretch of positive funding and the carry alone can erode the position. Leverage invites liquidation, and liquidations cluster — one cascade triggers the next. ADL can close your winner at the worst moment. And the whole thing rests on the exchange itself; counterparty risk in crypto is not theoretical.
Why they're hard to backtest
The number one mistake: ignoring funding. A perp backtest that skips the funding payments is fiction for anything held longer than a few hours — funding can quietly flip a "profitable" strategy into a losing one. You also have to model liquidations on the mark price, not your entry candle, and include fees. Test the instrument as it actually settles, or you're testing a ghost.
Understand the funding tether, and a perpetual stops being a mysterious casino chip and becomes what it is: a future with a toll, and a crowd on each side paying for where it leans.
Study the past — improve your future. 🥋
Educational content, not investment advice.