The Unlikely Origin Story of a Crypto Trading Revolution

A chance encounter on a Hong Kong hiking trail in 2015 sparked an idea that would change the face of cryptocurrency trading forever. Ben Delo, BitMEX co-founder and mathematician, was discussing a persistent problem with a friend, Bavik, a derivatives trader. BitMEX had tried various futures contracts, but customers continued to express frustration over positions closing without warning. They desired a product that mimicked spot trading but offered the leverage of derivatives. Delo's question, 'What if a future never expired?' was met with Bavik's response, 'Mathematically, it would be worth infinity.' This conversation laid the groundwork for the creation of the perpetual swap, a financial instrument that would go on to revolutionize the crypto trading landscape. 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. 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 approach, looking inward at how the swap was trading. This innovation allowed for a more accurate reflection of market conditions and helped maintain the contract price's alignment with the actual price of bitcoin. The perpetual swap's impact was profound, with BitMEX becoming the most liquid bitcoin market by 2017, processing $3-4 billion daily. 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 many eventually offering their own perpetual swaps, built on the funding rate architecture pioneered by Delo. The product's success has been staggering, with an estimated $40-50 trillion in annual turnover, making it one of the most successful financial products in history. As traditional finance regulators begin to take notice, the perpetual swap's influence is poised to extend beyond the crypto realm, potentially leading to a new era of innovation in financial markets.