The concept of the perpetual swap, also known as a perpetual future, was conceived on a hiking trail in Hong Kong in 2015. Ben Delo, co-founder of BitMEX and a mathematician, was discussing a persistent problem with a friend named Bavik, a derivatives trader. Despite trying various approaches, including quarterly, monthly, weekly, 48-hour, and 24-hour futures contracts, BitMEX struggled to find a solution that met customer demands for a product that resembled spot trading but offered the leverage of a derivatives exchange.
The breakthrough came when Delo asked, "What if a future never expired?" Bavik's response, "Mathematically, it would be worth infinity," sparked an idea. By charging traders the bitcoin overnight rate, similar to LIBOR in traditional finance, Delo created a framework for a perpetual swap.
However, he soon realized that the bitcoin overnight rate did not exist, prompting him to develop it. This innovation would go on to become one of the most significant financial products of the 21st century. The story of BitMEX's rise to becoming the most liquid bitcoin market in the world is deeply intertwined with the development of the perpetual swap. Initially, the exchange was designed with institutional hedgers in mind, but it was retail traders who ultimately drove its growth.
These traders sought high leverage and speculation opportunities, which BitMEX catered to by introducing 100x leverage and a real-time margining system. The perpetual swap, launched in May 2016, was a game-changer. It allowed for 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, with BitMEX taking no cut.
The funding rate was initially derived from third-party lending markets but was later adjusted to a dynamic model that looked inward at the swap's trading activity. This mechanism, which has been adopted by major derivatives exchanges worldwide, ensures a dynamic equilibrium by providing market makers with notice of how the funding rate is calculated and when it will be charged. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core. The concentration of liquidity was a direct result of the swap's design, which consolidated market maker capital into a single instrument.
Competitors took notice, with some literally copying the product, while others developed their own versions. Today, the perpetual swap is considered a financial innovation, with turnover reaching $40-50 trillion annually. BitMEX chose not to patent the perpetual swap, focusing instead on building and allowing the market to validate its success. As traditional finance regulators begin to take notice, with the CFTC reportedly making room for perpetual swaps and speculation about the CME listing them on equities, Delo sees this as the final validation of a concept born from a question on a Hong Kong hillside.