In 2015, a conversation between Ben Delo, a mathematician and BitMEX co-founder, and his friend Bavik, a derivatives trader, on a hiking trail in Hong Kong, sparked the idea of a perpetual swap, also known as a perpetual future or 'perp.' This innovative concept was born out of the frustration with traditional futures contracts, which would expire, causing positions to close without warning, much to the dismay of customers. Delo and his team had experimented with various contract durations, from quarterly to 24-hour futures, but none seemed to meet the needs of their clients, who desired a product that combined the benefits of spot trading with the leverage of derivatives. The perpetual swap was designed to address this issue by removing the expiry date, thereby allowing traders to maintain their positions indefinitely.
However, this introduced a new challenge: the need for a funding rate mechanism to keep the swap price aligned with the underlying asset's spot price. The solution involved charging traders an interest rate, similar to the LIBOR in traditional finance, but tailored to the bitcoin market. This groundbreaking concept has since become a cornerstone of cryptocurrency trading, with the perpetual swap now being offered by nearly every major exchange, and its turnover reaching staggering figures of $40-50 trillion annually. The impact of this innovation extends beyond the crypto space, with traditional finance regulators taking notice and considering the integration of perpetual swaps into their frameworks.
As Delo reflects on the journey, he notes that the decision not to patent the perpetual swap allowed the market to embrace and evolve the concept, ultimately leading to its widespread adoption and validation as a significant financial innovation.