Perpetual Futures contracts have 4 components that need to be considered when trading them. We will go through each one below.
- Initial Margin / Collateral
- Maintenance Margin
- Insurance Fund
- Funding rate
The initial margin refers to the collateral that a trader would add to initiate a position. Derivatives can often be purchased on margin, which means traders use borrowed funds to purchase them. This makes them even less expensive.
Fo eg. If you have 1 AVAX and have leverage of 10x. Then you can long or short 10 AVAX worth for the price of 1 AVAX which is placed in the protocol in exchange for the 10 AVAX position. This is your collateral.
The maintenance margin refers to the minimum collateral the trader must have to keep their position open. The maintenance margin is dynamic - so keep a close eye on it as the spot price of your collateralized asset and the spot price of the asset you’re speculating on, change often.
Your collateral falling below the maintenance margin leads to liquidations.
Sometimes, when a trader is liquidated in extreme market conditions, their liquidated collateral may not be enough to fully repay the debt. The trader is bankrupt and now owes the protocol assets/tokens. The insurance fund would swoop in and make the bankrupt trader whole, ensuring that they never owe more than their supplied collateral.
The funding rate is a fee imposed on either long or short positions to encourage the market price of the contract to mirror the spot price of the underlying asset. When the market is strongly bullish, longs pay shorts (positive funding rate) and when it’s bearish, shorts pay longs (negative funding rate). On Hubble, the funding rate will update each hour. Typically, the funding rate is represented in a small percentage, for example, 0.0005% per hour.