In 2015, on a hiking trail in Hong Kong, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived. Ben Delo, BitMEX co-founder and mathematician, was discussing a persistent problem with a friend, Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, but customers complained about positions closing without warning, seeking a product that resembled spot trading but offered the leverage of derivatives.
Delo asked, 'What if a future never expired?' Bavik replied, 'Mathematically, it would be worth infinity.' To address the issue of infinite value, Bavik suggested charging traders the bitcoin overnight rate. However, Delo was unsure what that rate was, so he decided to create it. This innovation led to the development of one of the most significant financial products of the 21st century.
Initially, BitMEX targeted institutional hedgers, but it was retail traders who dominated the platform, seeking high leverage for speculation. By October 2015, BitMEX offered 100x leverage, thanks to Delo's real-time margining system. The perpetual swap, launched in May 2016, was a futures contract with no expiry date, anchored to the spot price through a daily funding rate.
Longs paid shorts, or vice versa, depending on whether the swap was trading above or below spot. The early funding rate was derived from third-party lending markets but was later adjusted to a dynamic rate based on the swap's trading activity. This solution allowed market makers to anchor the swap's price to the spot price, creating a dynamic equilibrium. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core.
The concentration of liquidity was a result of the swap's design, which consolidated market maker capital into one instrument. Competitors took notice, and eventually, every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture Delo developed.
The product's success, with an estimated $40-50 trillion in annual turnover, has attracted the attention of traditional finance regulators, with the CFTC considering room for perpetual swaps under its framework.