The concept of the perpetual swap, also known as a perpetual future or 'perp', was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, BitMEX co-founder and mathematician, was discussing a persistent problem with a friend named Bavik, a derivatives trader. BitMEX had tried various futures contracts, including quarterly, monthly, weekly, 48-hour, and 24-hour contracts, but none of them worked as intended. Customers complained that their positions were closing without warning, and they wanted a product that resembled spot trading but offered the leverage of a derivatives exchange.
Delo asked, 'What if a future never expired?' Bavik's response was that it would be worth infinity from a mathematical perspective. However, he suggested charging traders the bitcoin overnight rate to address this issue. Delo decided to build this concept, which ultimately led to the creation 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 was trying to achieve before becoming the most liquid bitcoin market.
When Delo and Arthur Hayes founded the exchange in 2014, they focused on institutional hedgers, not retail traders. Their goal was to provide a platform for bitcoin miners and payment companies to hedge their exposure.
The institutions never came, but instead, sophisticated retail traders arrived, seeking to speculate with high leverage. BitMEX adapted to this demand, offering 100x leverage by Halloween 2015, made possible by Delo's real-time margining system.
The perpetual swap was launched in May 2016, with a core mechanic that involved 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 it eventually became dynamic, looking inward at how the swap was trading rather than outward at external markets. This solution 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 concentration of liquidity was a result of the swap's design, which collapsed multiple contracts into one instrument.
Competitors took notice, and eventually, every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture that Delo had developed. The fact that other exchanges have copied the swap validates its financial innovation, with a estimated $40-50 trillion in annual turnover.
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 under its framework, and speculation that the CME could list them on equities. For Delo, this prospect is the final validation of a concept that started as a question on a hillside above Hong Kong.