Perps on Synthetix Exchange
Understand these fundamentals!
Last updated
Understand these fundamentals!
Last updated
Perpetual swaps or Perps are a type of derivative contract that allows traders to speculate on the price of an underlying asset without owning it, similar to futures contracts. Unlike traditional futures, perpetual swaps have no expiration or settlement date, enabling traders to hold positions indefinitely. They achieve this through a mechanism called the funding rate, which periodically aligns the contract price with the underlying asset's market price. The funding rate is a small payment exchanged between traders who are long and those who are short, incentivizing balance in the market. This unique structure makes perpetual swaps highly liquid and versatile, ideal for hedging, leverage, or speculative trading.
In decentralized finance (DeFi), perpetual swaps have grown in popularity due to their accessibility and composability with other blockchain applications. Platforms like Synthetix enable decentralized perpetual swaps by using a liquidity pool model, removing the need for traditional market makers. Traders can access a wide range of synthetic assets with minimal slippage, thanks to deep liquidity provided by stakers and a robust incentive system. This on-chain approach eliminates intermediaries, reduces counterparty risk, and ensures a transparent trading environment, making perpetual swaps a cornerstone of modern DeFi markets.
Cross-margin accounts are designed to help traders manage risk more effectively. This system increases liquidity and reduces the chances of forced liquidation by allowing collateral to cover losses across multiple positions. While cross-margin provides flexibility, it requires caution. High market volatility can lead to unrealized gains or losses exceeding the initial collateral, potentially liquidating the entire account.
In Synthetix V3, cross-margin is currently the default margin type. Isolated positions will be introduced in the future, offering even greater flexibility for traders to manage their risk.
Synthetix V3 streamlines collateral management with a new wrapper mechanism. Instead of using sUSD directly as in earlier versions, traders can now deposit and withdraw USDC seamlessly on a 1:1 basis. This update simplifies onboarding and fund management, making it easier and more versatile for users to participate.
Funding rates play a crucial role in perpetual swaps. They ensure the contract price stays close to the underlying asset’s value by creating a balance between long and short traders. On Synthetix Exchange, if the funding rate is negative, traders with short positions compensate those with long positions. Conversely, when the rate is positive, long traders pay short traders. For a deeper dive into funding rates and their implications, visit our comprehensive guide
Unrealized Profit and Loss (UPNL)
UPNL showcases potential gains or losses that would result if a trader closed their position(s).
It's calculated using the difference in average entry price and the mark price
Realized Profit and Loss (UPNL)
PNL showcases gains or losses that are a result of a trader closing their position(s).
It's calculated using the difference in average entry price and the exit price
Liquidation:
Refers to the forced closure or unwinding of a trader's open futures position due to insufficient margin or collateral to cover the required maintenance margin minimums.
Open Interest (OI)
OI gives the total value of ongoing perpetual contracts held by traders. These are contracts that remain open and haven't been closed.
Account Health (Margin Ratio)
Represented as a percentage on both the dashboard & the main futures UI, it indicates the health of a trader's account.
When the equity balance matches the maintenance margin account health will reach 100% & traders will get liquidated.
Initial Margin
Is the percentage of the purchase of a future position that must be covered by cash or collateral when leverage trading. (I.E to open a $1000 notional trade at 10x a initial margin of $100 is needed)
Maintenance Margin
The minimum amount of equity a trader must maintain in their trading account to keep their position open. If the account balance (which combines deposited balances and UPNL) drops to this mark, liquidation will occur.
If account equity falls to or below the Maintenance Margin, liquidation will occur!
Account Equity
A combination of a trader's account balance and UPNL, this metric indicates a balance as if all positions are closed at the current time.