The idea for the perpetual swap, also known as a perpetual future or 'perp,' was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, BitMEX co-founder and mathematician, was discussing a problem that had been plaguing him for months with his friend Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, including quarterly, monthly, weekly, 48-hour, and 24-hour contracts, but none of them were working as intended.
Customers were complaining that their positions were being closed without warning, and they were looking for a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo posed a question: 'What if a future never expired?' Bavik's immediate response was that it would be mathematically worth infinity. However, he also proposed a solution: charge traders the bitcoin overnight rate, similar to how LIBOR is used in traditional finance.
The issue was that Delo was unaware of such a rate existing, so he set out to create it. This innovation would go on to become one of the most significant financial products of the 21st century. To understand the impact of the perpetual swap, it's essential to consider what BitMEX was initially trying to achieve. Founded in 2014 by Delo and Arthur Hayes, the exchange aimed to provide a platform for institutional hedgers, such as bitcoin miners and payment companies, to manage their exposure.
However, instead of attracting institutions, the exchange drew in sophisticated retail traders who were looking to speculate with high leverage. BitMEX adapted to this demand, and by October 2015, the exchange was offering 100x leverage, made possible by Delo's real-time margining system. The perpetual swap was launched in May 2016, with a core mechanic that involved a futures contract with no expiry date, anchored to the spot price through a daily funding rate. The rate was designed to be a balancing mechanism, with longs paying shorts or vice versa, depending on whether the swap was trading above or below spot.
Initially, the funding rate was derived from third-party lending markets, but this approach eventually proved inadequate. As bitcoin's price rose in 2016 and 2017, demand for long exposure on BitMEX overwhelmed the funding mechanism, causing the contract price to drift away from the actual bitcoin price. Delo and his team had to dynamically adjust the funding rate calculation to look inward at how the swap was trading on BitMEX, rather than relying on external lending markets. This new approach involved measuring the gap between the swap and spot prices over an eight-hour window, treating it as an implied basis, and back-calculating the annualized rate from it.
The solution proved elegant, as it gave market makers notice of how the rate was calculated and when it would be charged, allowing them to anchor the swap back to the spot price. This funding rate mechanism is now used by every major derivatives exchange in the world.
By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion in daily transactions, with the perpetual swap at its core. The concentration of liquidity was a direct result of the swap's design, which consolidated market maker capital into a single instrument.
Competitors took notice, and many exchanges eventually offered their own perpetual swaps, built on the funding rate architecture that Delo had developed. The fact that every major exchange has copied the swap is a testament to its financial innovation, with Delo estimating that it now facilitates $40-50 trillion in annual turnover. BitMEX chose not to patent the perpetual swap, opting instead to focus on building and improving the product.
Now, a decade later, the product is attracting the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework, and speculation that the CME could eventually list them on equities. For Delo, this is the final validation of an idea that began as a question on a hillside above Hong Kong, driven by a desire to address his customers' complaints about disappearing positions.