The concept of perpetual futures has become a cornerstone of the cryptocurrency market, but according to DRW CEO Don Wilson, common perceptions about this financial product are misguided. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date.
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 distinction between the contract and its implementation is crucial, stating, 'Most of what people think they know about 'perps' ...
has nothing to do with the contract itself.' As interest in introducing perpetual futures to regulated US markets grows, Wilson's comments are particularly pertinent. Several exchanges are exploring the launch of perpetual futures beyond the crypto sphere, but regulatory frameworks and whether these products fit within existing futures or swaps frameworks remain uncertain.
Recently, Kalshi submitted a proposal to regulators to expand its offerings to include precious metals. Unlike traditional futures markets, crypto exchanges operate continuously, utilize digital collateral, and can calculate margin requirements in real time. These technological advancements have enabled exchanges to offer products with higher leverage and alternative liquidation mechanisms. However, Wilson cautioned against confusing these design choices with the inherent nature of perpetual futures.
He expressed his disapproval of auto-deleveraging, stating, 'I'm not a fan of ADL,' and noted that its use is not necessary for perpetual futures. Instead, Wilson highlighted the potential of digital payment systems to enhance risk management.
Traditional clearinghouses typically calculate margin once a day, requiring market participants to post additional collateral by the following business day. In contrast, real-time settlement allows exchanges to recalculate margin continuously, reducing the need for large upfront margin buffers while maintaining the same level of protection.
Wilson argued that whether exchanges choose to translate these efficiencies into higher leverage is a business decision, not a defining feature of perpetual futures. The true innovation of perpetual futures, according to Wilson, lies in their ability to eliminate the need for investors to repeatedly roll expiring contracts.
This reduction in transaction costs, market impact, and roll slippage enables positions to more closely track the front of the futures curve. Wilson urged regulators to focus on the economic substance of perpetual futures rather than their legal labels, emphasizing, 'There's no reason to treat perpetuals as swaps simply because they don't expire. Economically, they're futures.' Ultimately, Wilson advocated for the broader adoption of perpetual futures across various markets, including commodities, securities, and crypto, viewing them as a valuable tool for price discovery and risk management rather than a crypto-specific innovation.