Note On Perpetual Swap Models

Perpetual swap model broadly is very simple:

  • Zero-sum game between Longs and Shorts (same as futures)
  • Set and pay a rate between Longs and Shorts to tax overvalued/undervalued swap

Rate is determined by a spot index and the premium or discount of the contract to this index.

If the swap is trading too high vs spot, then a rate will tax Longs to make traded price lower (i.e., closer to spot).

If the swap is trading too low vs spot, then a rate will tax Shorts to make traded price drift higher (i.e., closer to spot)

There are a few dimensions to consider:

  • Rate length: 2–24 hours, used to anchor some rate to adjust overpriced/underpriced swap
  • Rate calculation: Instant, 4 hours, 8 hours, 24 hours
  • Setting of rate: Variable (changes intra-interval), Fixed (changes inter-interval)
  • Paying of interest: Discreet (happens at single point of time usually at end of interval but can be in gaps too), Continuous (happens throughout the interval, realtime)

There is a lot of competition in the perp space, below is a taxonomy of the offerings currently live and going live in the next month:

  • Instant 8-hour Variable Continuous(Deribit)
  • 8hour 8-hour Fixed Discreet (BitMEX)
  • 4hour 4-hour Fixed Continuous (CryptoFacilities)
  • 1day 1day Fixed Discreet (OKex)

With discreet payouts, the adjustment mechanism is more jumpy, and people are rewarded for holding a position for just 1 second or 1 minute if they jump in before the payout time of 12 UTC, 20 UTC, and 4 UTC.

With continuous payouts, the adjustment mechanism is smoother and theoretically should be more efficiently pegging the value to spot.

Variable rate payouts which change continuously, like Deribit, have the downside of no rate certainty. With fixed rate payouts like BitMEX and CryptoFacilities, there is at least some short-term certainty over what the rate is.

In financial theory, one would synthesize a long in XBT/USD by borrowing USD and buying XBT to lend XBT at a rate. This is why there is an equilibrium around Longs paying Shorts in margin trading since the rate differential favours BTC and thus the cost of holding long is more.

Regardless of what model is used, these products should have rates that roughly converge to the basis that is observed in other markets, e.g., Bitfinex and Poloniex funding rates, as well as Futures premiums in CME/Cboe.