The introduction of perpetual futures into regulated markets has sparked a heated debate, with critics warning of the potential for systemic risk due to their high-leverage nature. However, this criticism is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design. The true risk lies in the venue's choices, such as leverage caps, margin rules, and default management.
The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by various factors, including macro shocks, stablecoin de-pegs, and exchange outages. The key to mitigating this risk is not to ban perpetual futures, but to ensure that the venue is designed to contain and manage risk effectively. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential in securing the baseline.
The real question is not whether perpetuals belong in regulated markets, but how a given venue is built to handle defaults and liquidations. Institutions may not want perpetuals as a replacement for regulated futures, but they can be used to hedge delta, and their liquidity is a valuable asset. The design of perpetual futures draws in retail flow, which concentrates liquidity, making them a valuable tool for institutions. The debate surrounding perpetual futures is not about their inherent risk, but about how venues handle defaults and liquidations.
Regulated clearing has established a standard for managing risk, and it is this standard that Bullish is building towards. By containing risk at its source, rather than transmitting it to the market, perpetual futures can become a valuable infrastructure for institutions.