What is a perpetual futures contract?
Why this lesson exists
If you've traded shares on NSE or BSE, perpetual futures will look familiar at first. You see a price, you buy, the price goes up, you sell, you make money. The shape is the same.
The mechanics are different in three ways that matter. Get those right and the rest of this module is easy. Get them wrong and you'll be surprised by your own positions for months.
This lesson covers what a perpetual is, how it stays close to the underlying price without ever expiring, and why xtree uses Lighter.xyz perpetuals instead of stock futures or spot crypto.
A perpetual is a futures contract that never expires
A traditional futures contract has an expiry date. You agree today to buy BTC at ₹85,00,000 on the last Thursday of next month. On expiry day, the contract settles — either you take delivery, or it cash-settles and the contract is gone. To keep a position, you'd have to "roll" — close the expiring one and open the next month's.
A perpetual skips all of that. There's no expiry. You open a long, and you can keep it open for hours, days, or months. Your P&L moves with the price, like spot. When you want out, you close it.
The catch: with no expiry forcing the contract price back to spot, what stops the perpetual from drifting far from the underlying? That's where the funding rate comes in.
How the funding rate keeps the price honest
Every 8 hours (on most venues), longs and shorts settle a small payment between themselves based on the gap between the perpetual price and the underlying index.
- If the perpetual trades above the underlying (longs are paying a premium), longs pay shorts. This makes holding a long more expensive, which discourages new longs and pushes the price back toward spot.
- If the perpetual trades below the underlying, shorts pay longs.
The payment is small — typically a few basis points per 8-hour window. But it's directional, and it gives traders a clear incentive to arbitrage away large gaps. In practice, perpetual prices stay within 5–15 bps of the underlying most of the time.
The funding payment comes out of your margin every 8 hours, not at the end of the day. If you hold a long during a positive funding period, you'll see your balance tick down slightly even if the price hasn't moved.
On xtree, funding payments are passed through from Lighter.xyz directly. You don't see a separate line item for funding — it's reflected in your equity at each 8-hour window. If you hold a position overnight, expect a few hundred rupees of funding cost or credit depending on which side you're on.
Why traders use perpetuals instead of spot
Three reasons.
Leverage. On spot crypto, you put up the full value of what you're buying. Want ₹10L of BTC exposure? You need ₹10L of capital. On a perpetual with 10× leverage, ₹1L of margin gets you the same ₹10L of exposure. (The trade-off is real and gets its own lesson — see Leverage, margin, and liquidation.)
Easy shorting. Going short on spot crypto requires borrowing the coin, which is operationally messy and not always available. On a perpetual, "short" is just a button — you sell to open, buy to close.
24/7 markets. Crypto perpetuals trade continuously. There's no opening bell. Compared with NSE F&O (which closes daily at 3:30 PM IST and on weekends), this means more opportunities — and more chances to get hurt while you're asleep.
Why xtree uses Lighter.xyz perpetuals specifically
xtree is a simulated trading platform — no real money changes hands inside the evaluation. But the prices you see are real, and they come from Lighter.xyz.
Lighter is a decentralised perpetuals exchange with three useful properties for our purposes:
- Deep liquidity on BTC, ETH, SOL and a thin but real book on the commodity perps (xGOLD, xSILVER, xOIL). Enough that mid-prices aren't easily manipulated by a single retail order.
- 24/7 operation, UTC-anchored. This matters because xtree's daily settlement happens at 05:30 IST (= 00:00 UTC). The choice was deliberate: most Indian traders are asleep at settlement time, so positions don't get force-closed mid-session for someone watching a chart.
- Standard funding mechanism. What you learn here about funding rates applies directly to the live Lighter prices xtree displays. There's no translation layer.
You're paper-trading, but you're paper-trading against the same prices a Lighter trader sees in real time.
Reading the price you see on xtree
Open a position on xtree and look at the order panel. You'll see a few prices:
- Last — the price of the most recent trade on Lighter.
- Bid — what someone is willing to pay right now (the best buy offer).
- Ask — what someone is willing to sell at right now (the best sell offer).
- Mid-mark — the average of bid and ask. This is the number xtree uses for your equity and rule checks.
Why mid-mark instead of last? Because last-trade prices can be moved by a single small trade. Mid-mark is harder to game and is the closest thing to a "fair" price at any moment. The full reasoning is in Reading the orderbook, lesson 1.5.
Worked example: a simple BTC long
You think BTC is going up. Current Lighter BTC perp price: ₹85,00,000. You open a long of 0.1 BTC with 5× leverage.
- Notional exposure: 0.1 × ₹85,00,000 = ₹8,50,000
- Margin required: ₹8,50,000 / 5 = ₹1,70,000
Two hours later, BTC has moved to ₹86,00,000. You close.
- Profit per BTC: ₹86,00,000 − ₹85,00,000 = ₹1,00,000
- Profit on 0.1 BTC: ₹10,000 (before fees)
- xtree fees: 5 bps on entry + 5 bps on exit = ~₹850 total
- Net realised: roughly ₹9,150
pnl = (exit − entry) × size = (₹86,00,000 − ₹85,00,000) × 0.1 = ₹10,000
Notice the leverage didn't multiply your P&L. The price moved ₹1L per BTC, you held 0.1 BTC, you made ~₹10K. The 5× leverage just meant you only had to put up ₹1.7L of margin to get that ₹8.5L of exposure. This is the single most important thing to internalise about leveraged trading — it's covered in detail in lesson 1.3.
A common misunderstanding to avoid
People sometimes think "10× leverage means I make 10× the money." That's not what leverage does. Leverage affects how much margin you need to control a position, not how much you earn per rupee of price movement.
If BTC moves ₹1,00,000 and you're long 1 BTC, you make ₹1L of P&L. Whether you used 1× leverage (₹85L margin) or 10× leverage (₹8.5L margin), the P&L is ₹1L. What changes is your return on margin: ~1.2% at 1× vs ~12% at 10×. Same money, smaller margin.
The other side: that 12% return becomes a 12% drawdown the moment the price moves against you by the same amount. Leverage is a margin tool, not a profit multiplier.
Recap
- Perpetuals are futures contracts that never expire. The funding rate keeps the price close to the underlying.
- You trade them for the leverage, the easy shorting, and the 24/7 market.
- xtree uses live Lighter.xyz perpetual prices, mid-mark, with UTC-anchored daily settlement at 05:30 IST.
- Leverage controls your margin requirement, not your P&L per rupee of price movement.
Next up: how leverage actually works — the formula, the trade-offs, and how to compute your own liquidation price.
Test yourself
Next lesson: Leverage, margin, and liquidation — derive the liquidation formula and compute your own.