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 walking with his friend Bavik, a derivatives trader, grappling with a problem that had been bothering him for months.
BitMEX had tried various approaches, including quarterly, monthly, weekly, 48-hour, and 24-hour futures contracts, but nothing seemed to work. Customers complained about their positions closing without warning, seeking a product that resembled spot trading but offered the leverage of a derivatives exchange.
Delo asked, 'What if a future never expired?' Bavik replied, 'Mathematically, it would be worth infinity.' Although technically correct, Bavik proposed a solution: charge traders the bitcoin overnight rate. However, Delo was unaware of such a rate, prompting him to create it. This innovation led to the development of 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 aimed to achieve before becoming the most liquid bitcoin market.
Founded in 2014 by Delo and Arthur Hayes, the exchange targeted institutional hedgers, but instead, it attracted sophisticated retail traders seeking speculation and high leverage. By Halloween 2015, BitMEX offered 100x leverage, thanks to Delo's real-time margining system. The issue with futures contracts was the basis premium, which confused many in the crypto space. BitMEX shortened the expiry of its listed futures contracts, but customers still struggled to understand why their positions closed.
The hiking trail conversation gave Delo the framework to build a leveraged product that never expired. The perpetual swap launched in May 2016, with a daily funding rate anchoring it to the spot price.
Initially, the funding rate was derived from third-party lending markets, but it eventually became dynamic, looking inward at the swap's trading activity. This approach allowed market makers to anchor the swap back to the spot price, creating a dynamic equilibrium. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its center.
The product's design concentrated liquidity, and competitors took notice, with many copying the concept. Today, every major exchange in crypto offers a perpetual swap, built on the funding rate architecture Delo created.
The product's success has attracted traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. For Delo, this is the final validation of an idea born on a hillside above Hong Kong, which started as a question about how to address customers' complaints about disappearing positions.