In 2015, on a hiking trail in Hong Kong, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was born. Ben Delo, BitMEX co-founder and mathematician, was discussing a problem with a friend, Bavik, a derivatives trader.
BitMEX had tried various futures contracts, but customers kept complaining about positions closing without warning. They wanted a product that resembled spot trading but offered the leverage of derivatives. Delo asked, 'What if a future never expired?' Bavik replied that mathematically, it would be worth infinity.
However, he suggested charging traders the bitcoin overnight rate to solve the issue. Delo built it, inventing one of the most significant financial products of the 21st century.
To understand the perpetual swap's impact, it's essential to consider what BitMEX was trying to achieve before becoming the most liquid bitcoin market. Initially, the founders focused on institutional hedgers, but the exchange eventually attracted retail traders seeking 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, the premium at which a futures contract trades above the spot price. In traditional finance, this is well understood, but in crypto, it caused confusion. 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. The early funding rate was derived from third-party lending markets but was later adjusted to a dynamic approach, looking inward at how the swap was trading.
This solution, now used by every major derivatives exchange, gave market makers notice of how the funding rate was calculated, allowing them to anchor the swap back to the spot price. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its center. The concentration of liquidity was a product of the swap's design, collapsing multiple contracts into one instrument. Competitors noticed, and eventually, every major exchange in crypto offered its own perpetual swap.
The fact that every other exchange has copied the swap proves its financial innovation, with Delo estimating it now does $40-50 trillion in turnover annually. BitMEX chose not to patent the perpetual swap, focusing on building instead. Now, traditional finance regulators are taking notice, with the CFTC reportedly making room for perpetual swaps, and speculation that the CME could list them on equities.
For Delo, this is the final validation of a product that started as a question on a hillside above Hong Kong.