The concept of perpetual futures has become a cornerstone of the crypto financial landscape, but according to DRW CEO Don Wilson, much of the general understanding surrounding this product is misguided. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date. The characteristics often associated with crypto perpetuals, such as high leverage and auto-deleveraging, are not inherent to the contracts themselves but rather a result of how some crypto exchanges have chosen to implement them. Wilson emphasized that the features commonly linked to perpetual futures are 'not about the contract itself.' His comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets.
Several exchanges are exploring the launch of perpetual futures beyond the crypto sphere, although questions persist regarding how these products should be regulated and whether they fit within existing frameworks. Unlike traditional futures markets, crypto exchanges operate continuously, utilizing digital collateral and real-time margin requirement calculations. These technological differences have enabled exchanges to offer products with higher leverage and alternative liquidation mechanisms.
However, Wilson cautioned against confusing these design choices with the fundamental nature of perpetual futures. He expressed his dislike for auto-deleveraging, stating that it is not a necessary component of perpetual futures. Instead, Wilson argued that digital payment systems create opportunities for enhanced risk management. Traditional clearinghouses typically calculate margin on a daily basis, allowing market participants a window of time to post additional collateral.
Because markets can fluctuate significantly during this period, clearinghouses require sizable initial margin buffers. In contrast, real-time settlement enables exchanges to recalculate margin continuously, allowing for immediate collateral posting and reducing the need for large upfront margin requirements while maintaining the same level of protection. Wilson noted that the true innovation of perpetual futures lies in their ability to eliminate the need for repeated contract rollovers, thereby reducing transaction costs and market impact.
He urged regulators to focus on the economic substance of perpetual futures rather than their legal classification, asserting that 'economically, they're futures.' Wilson concluded by advocating for the broader availability of perpetual futures across various markets, including commodities, securities, and crypto, and arguing that they should be viewed as a tool for price discovery and risk management rather than a crypto-specific innovation.