The idea for the perpetual swap, also known as a perpetual future or 'perp,' was conceived on a hiking trail in Hong Kong in 2015. Ben Delo, BitMEX's co-founder and a mathematician, was discussing a problem that had been plaguing him for months with his friend Bavik, a derivatives trader. BitMEX had been experimenting with various futures contracts, including quarterly, monthly, weekly, 48-hour, and even 24-hour contracts, but none of them were working as intended. Customers were complaining that their positions were being closed without warning, and they wanted a product that mimicked 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 mathematically worth infinity, as the value of a futures contract is partly derived from the time remaining until expiry and the cost of carrying the position. However, Bavik suggested charging traders the bitcoin overnight rate to address this issue.
The problem was that such a rate did not exist at the time. Delo decided to create it, and in doing so, he invented 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 it became the most liquid bitcoin market in the world.
When Delo and Arthur Hayes founded the exchange in 2014, they were focused on serving institutional hedgers, not retail traders. Hayes had worked at Deutsche Bank, while Delo had spent years developing high-frequency trading systems at JP Morgan. Their goal was to provide a professional infrastructure for bitcoin miners and payment companies to hedge their exposure. However, the institutions never came, and instead, sophisticated retail traders flocked to the platform, seeking to speculate with high leverage.
BitMEX adapted to this demand, offering 100x leverage by Halloween 2015, made possible by a real-time margining system built by Delo. The issue with futures contracts, even short-dated ones, was the basis, the premium at which a futures contract trades above the spot price of the underlying asset. This concept was not well understood in the crypto space in 2015. Customers would often ask why bitcoin was more expensive on BitMEX, and the exchange would explain that it was due to the implied interest rate.
The solution to this problem was the perpetual swap, which launched in May 2016. The 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. Initially, the funding rate was derived from third-party lending markets, but this approach had limitations.
As bitcoin's price rose in 2016 and 2017, demand for long exposure on BitMEX overwhelmed the funding mechanism, causing the swap to trade at a persistent premium to spot. Delo and his team had to dynamically adjust the funding rate calculation to address this issue. The new approach looked inward at how the swap was trading on BitMEX, rather than relying on external lending markets.
The solution was elegant: the exchange measured the gap between the swap and spot prices over an eight-hour window, treated it as an implied basis, and back-calculated the annualized rate from it. This rate was then charged at the end of the next eight-hour window, providing market makers with notice and allowing them to anchor the swap back to the spot price.
This funding rate mechanism is now used by every major derivatives exchange in the world. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion a day, with the perpetual swap at its core. The concentration of liquidity was a result of the swap's design, which collapsed multiple futures contracts into one instrument. Competitors took notice, and some even copied the product without fully understanding how it worked.
Today, every major exchange in crypto offers its own perpetual swap, each built on the funding rate architecture that Delo pioneered. The fact that the perpetual swap has been so widely adopted is a testament to its financial innovation. Delo estimates that it now facilitates $40-50 trillion in turnover annually, making it one of the most successful products in the history of capitalism. BitMEX chose not to patent the perpetual swap, opting instead to focus on building and improving the product.
The market has validated its worth, and now, a decade on, traditional finance regulators are taking notice. The CFTC is reportedly making room for perpetual swaps under its framework, and there is speculation that the CME could eventually list them on equities. For Delo, this prospect is the final validation of an idea that started as a question on a hillside above Hong Kong, asked by someone who had grown tired of watching his customers complain about positions that kept disappearing.