The idea for the perpetual swap was conceived in 2015 on a hiking trail in Hong Kong, where Delo was discussing the challenges of traditional futures contracts with a friend, Bavik, a derivatives trader. Delo's customers were complaining about positions closing without warning, and he wanted to create a product that combined the benefits of spot trading with the leverage of derivatives. Bavik suggested removing the expiry date from a futures contract, which would make its value theoretically infinite. However, by charging traders an overnight rate, similar to LIBOR in traditional finance, Delo found a solution.
He built the perpetual swap, which launched in May 2016 and became a huge success, transforming BitMEX into the most liquid bitcoin market in the world. The product's core mechanic was straightforward: 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 funding rate was initially derived from third-party lending markets but was later adjusted to be dynamic, looking inward at how the swap was trading rather than outward at external markets.
This approach allowed the exchange to measure the implied basis and back-calculate the annualized rate, creating a dynamic equilibrium. The perpetual swap's success can be seen in its widespread adoption by other exchanges, with some estimates suggesting it now facilitates over $40 trillion in annual turnover. Delo's innovation has attracted the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework.
As the product continues to evolve, it's clear that the hike in Hong Kong was just the beginning of a revolutionary journey in crypto trading.