On this page (8 sections)
Who should skip this?
Skip this explainer if you wanted a first spot swap, or you already trade perps. It defines funding and liquidation. The Hyperliquid, GMX or Drift how-tos are the next tab only if you can lose the margin.
- You wanted Uniswap or Jupiter spot
- You cannot afford a total loss of margin
- You needed a CEX futures help desk
What Is a Perpetual Swap?
A perpetual swap (or perp) is a derivative contract that tracks the price of an underlying asset — typically a cryptocurrency — but never expires. Unlike a futures contract (which expires on a fixed date and settles), you can hold a perp position indefinitely.
You can go long (betting the price will rise) or short (betting the price will fall), and use leverage to amplify your position. With 10x leverage, you control $10,000 of ETH exposure with only $1,000 in margin — amplifying both gains and losses proportionally.
BitMEX launched the first crypto perpetual swap in 2016, building on an idea Robert Shiller proposed in 1993, and perps have since become the dominant product in crypto derivatives by volume. By late 2025, on-chain perp DEX volume passed $1 trillion in a single month (October 2025, per DefiLlama data).
The Funding Rate: How Perps Stay Aligned with Spot Price
Because perps never expire, a mechanism is needed to keep the perp price aligned with the actual (spot) market price. That mechanism is the funding rate — a periodic payment between long and short traders.
If the perp price trades above spot (more longs than shorts — bullish sentiment dominates), long traders pay a funding fee to short traders. This incentivises new shorts and discourages new longs, pulling the perp price back toward spot.
If the perp price trades below spot, short traders pay longs — incentivising longs and discouraging shorts. Funding rates are settled every 8 hours on most centralised exchanges and hourly or continuously on most DEX perp platforms.
During strong bull markets, funding rates can reach 0.1–0.5% per 8 hours (roughly 110–550% a year, simple annualised over 1,095 eight-hour periods) for long positions. Always factor in the funding cost when planning to hold a leveraged position overnight or longer.
Liquidation: When Leverage Goes Wrong
When you open a leveraged position, you post margin — collateral covering potential losses. If the market moves against you and your losses approach your margin, the protocol automatically liquidates your position: it closes the trade and uses your margin to cover the loss.
At 10x leverage, a 10% adverse price move wipes out your entire margin. At 50x leverage, a 2% adverse move triggers liquidation. Higher leverage means a smaller buffer against normal market volatility — even routine 5–10% intraday swings can trigger liquidation at extreme leverage.
Liquidation on DEX perp platforms is handled by smart contracts and liquidation bots, not customer support. Most well-designed platforms use partial liquidation (reducing position size) before fully closing a position to minimise user losses.
- Never use maximum available leverage — 2–5x is appropriate for most traders; 10x+ should be reserved for experts who actively monitor positions
- Calculate your liquidation price before opening the position — all platforms display this clearly
- Set a mental stop-loss before entering any position — liquidation should not be your exit strategy
- Keep additional margin available to top up if the position moves against you
- Understand the platform's insurance fund — it covers liquidation shortfalls that exceed a trader's margin
Leading DEX Perpetual Swap Platforms
| Platform | Blockchain | Max Leverage | Model | Notable Feature |
|---|---|---|---|---|
| dYdX | dYdX Chain (Cosmos) | 20x | Order book | Runs on its own chain; zero gas for trading |
| Hyperliquid | Hyperliquid L1 | Up to 40x (BTC); lower on other assets | Fully on-chain order book (HyperCore) | Leading on-chain perp venue by volume in late 2025; sub-second finality |
| GMX | Arbitrum / Avalanche / MegaETH | Up to 100x | GM/GLV liquidity pools (GLP retired in 2025) | Oracle pricing; LPs are counterparty to traders; V1 exploited for ~$42M in July 2025 (most returned) |
| Velocity (formerly Drift) | Solana | Varies (high-leverage mode removed) | Order book + AMM (Drift v2 fork) | Drift was exploited for ~$285M on 1 April 2026; relaunched as a perps-only fork with USDT margin |
| Gains Network (gTrade) | Arbitrum / Polygon / Base (+ others) | Up to 200x on BTC/ETH | Synthetic, multi-collateral (varies by chain) | Stocks, forex, and crypto pairs available; no underlying custody |
dYdX vs GMX: The Two Dominant Models Compared
dYdX uses a traditional order-book model — buyers and sellers place limit and market orders that match against each other, exactly as on a centralised exchange. This means no price impact for large trades when the book is deep and tight spreads in liquid markets. dYdX migrated to its own Cosmos-based chain in late 2023 to achieve higher throughput and eliminate gas costs.
GMX uses a liquidity-pool model. Its V2 pools — GM pools for single markets and GLV vaults spanning several — act as the counterparty to trades; the original multi-asset GLP pool was phased out after the July 2025 V1 exploit and can now only be redeemed. Liquidity providers earn trading fees plus borrow fees from leveraged traders. GMX traders open at the oracle price (V2 charges or credits price impact when a position is closed or reduced) — but when traders collectively profit, liquidity providers collectively lose.
The key trade-off: on dYdX, you trade against other humans in an order book. On GMX, you trade against the liquidity pool. Long-term GMX data shows the pool is profitable overall (traders collectively lose to the pool), making GM/GLV provision a reasonable yield strategy — but individual periods of heavy trader wins can pressure pool value significantly.
Sources
Primary documentation and data this guide relies on. Links checked .
- FCA to lift ban on crypto ETNs to support UK growth and competitiveness — UK FCA. FAQ 'Are crypto perps regulated in the UK?': retail crypto-derivatives ban since January 2021, still in force
- ESMA reminds firms of their obligations under CFD product intervention measures amid rising offerings of perpetual futures — European Securities and Markets Authority. Regulatory context: perps sold to EU retail fall under CFD leverage limits and protections
- CFTC Issues Orders Against Operators of Three DeFi Protocols for Offering Illegal Digital Asset Derivatives Trading — US CFTC. US regulatory context: DeFi perp platforms offering leveraged derivatives to US retail must register
- Fundamentals of Perpetual Futures — arXiv (He, Manela, Ross, von Wachter). Origin (BitMEX 2016) and the funding-rate mechanism tying perp prices to spot
- Funding — Hyperliquid documentation. Funding section: longs pay shorts when perp trades above spot; DEX venues settle hourly
- GMX - Rekt — rekt.news. FAQ 'Is GMX safe?': GMX V1 suffered a major smart-contract exploit in July 2025
- Liquidity on V1 — GMX documentation. dYdX vs GMX section: GLP pool model is discontinued; V2 uses GM/GLV pools
Frequently asked questions
Are crypto perps regulated in the UK?
Crypto derivatives, including perpetual swaps, are regulated financial instruments under UK law — and since 6 January 2021 the FCA has banned firms acting in, or from, the UK from selling, marketing or distributing them to retail consumers. The FCA confirmed in 2025 that this ban will remain in place, so there is no FCA-authorised route for a UK retail consumer to trade crypto perps. DEX perp platforms (dYdX, GMX, Hyperliquid and others) are not FCA-authorised, and using offshore or DeFi venues gives UK users none of the FCA's protections. A register check does not make a crypto perp available to retail.
What is the difference between perps and futures?
Both are derivative contracts with leverage tracking an asset's price. Futures expire on a specific date and settle at that point. Perpetual swaps have no expiry date — they stay aligned with spot via the funding rate. Most retail crypto trading uses perps rather than futures because they are simpler to manage without expiry deadlines forcing position closure.
Can you lose more than your initial margin with perps?
On most well-designed platforms, your position is liquidated before losses exceed your initial margin — so you cannot lose more than you deposited. In extreme market conditions (flash crashes, oracle failures), the liquidation mechanism can fail. Insurance funds on platforms like GMX and dYdX are designed to cover these shortfalls.
What is open interest in perps?
Open interest is the total value of all outstanding long and short positions on a perp contract. High open interest heavily skewed to one side (e.g., 80% long) indicates a crowded trade and creates strong funding rate pressure against that side. Crowded trades can unwind violently when sentiment shifts, causing rapid price moves and cascading liquidations.
Is GMX safe?
GMX has undergone multiple security audits, but it is not exploit-free: on 9 July 2025 attackers drained about $42M from GMX V1 on Arbitrum through a reentrancy bug that inflated GLP pricing (most funds were returned in exchange for a bounty), and GLP was then phased out. Liquidity providers in GMX V2's GM and GLV pools carry the risk of trader profits (if traders win, the pool loses value), and all DeFi protocols carry non-zero smart contract risk regardless of audit history.