Primer on Perps, Open Interest, etc

Futures

Futures, or a futures contract is an agreement to buy or sell something at a predetermined price at a specified time in the future. It is an obligation to buy/sell at that date/time

An Option is the right to buy/sell at that date or time. You pay a premium for the 'right' or 'option' to buy or sell at a specified price at a later date.

Perpetual swaps are Futures contracts which don't expire. They are extremely liquid and offer cheap leverage.

They mimic the spot price through the funding rate mechanism.

Open Interest

Open Interest is the number of futures contracts open.

There is a long for every short and vice versa.

It's used to gauge the aggression of market participants who are long or short.

We want to know if the arbitragers (market makers) are on the long or short side.

Premiums & Funding

Funding rate is based on the premium/discount.

Premium is the difference of the perpetual and the weighted average (index) of all major spot exchanges

(Perp - Index = Premium or Discount)

So we have an index, which is the aggregated average of all the spot prices on various exchanges.

We have the price of our perpetual futures contract. We subtract the index price from the spot price, and are left with either a positive+ or negative- number. That is the premium+ or the discount-.

On most exchanges, this rate is payed out every 8 hours to incentivize entities to take the other side of the trade.