The concept of perpetual futures has become a staple in the world of cryptocurrency, but according to DRW CEO Don Wilson, there are many misconceptions surrounding this financial product. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date.
The characteristics often associated with crypto perpetuals, such as high leverage and auto-deleveraging, are a result of how some crypto exchanges have chosen to implement these products, rather than being inherent to the contracts themselves. Wilson's comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets. Several exchanges and market participants are exploring the launch of perpetual futures beyond the crypto space, but there are still questions about how these products should be regulated. Unlike traditional futures markets, crypto exchanges operate continuously and use digital collateral, allowing for real-time calculation of margin requirements.
Wilson emphasized that these design choices should not be confused with the concept of perpetual futures itself. Instead, he argued that digital payment systems create opportunities for improved risk management.
Traditional clearinghouses typically calculate margin once a day, requiring large initial margin buffers to account for potential market movements. In contrast, exchanges with real-time settlement can recalculate margin continuously, reducing the need for large upfront margin requirements while maintaining the same level of protection. Wilson noted that the true innovation of perpetual futures lies in their ability to eliminate the need for investors to repeatedly roll over expiring contracts, resulting in reduced transaction costs and market impact.
He urged regulators to focus on the economic substance of perpetual futures rather than their legal classification, stating that they should be treated as futures rather than swaps. Ultimately, Wilson advocated for the broader adoption of perpetual futures across various markets, including commodities, securities, and cryptocurrencies, viewing them as a valuable tool for price discovery and risk management.