The Differences Between Perpetual and Traditional Futures Contracts:
Traditional futures contracts usually have fixed expiration dates and require settlement upon expiration, which is usually based on the spot price of the underlying asset at the expiration date.
Perpetual contracts, on the other hand, do not have a fixed expiration date and can be traded continuously until one party chooses to close their position. Settlement is typically done through a funding rate mechanism, where buyers and sellers exchange funding rates at each settlement period (usually every 8 hours). If the funding rate is positive, long positions pay shorts, and if the funding rate is negative, shorts pay longs.The purpose of the funding rate is to keep the contract price in line with the spot price of the underlying asset.
In addition, perpetual contracts typically operate like margin trading, requiring investors to deposit a certain amount of margin before trading. The required margin will vary depending on the holding period and position size, allowing for leveraged trading.
Overall, compared to traditional futures contracts, perpetual contracts offer more flexible trading, longer trading periods, and settlement through funding rates rather than at expiration.