The concept of the perpetual swap, a groundbreaking financial instrument, was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, BitMEX's co-founder and a mathematician, was discussing a persistent problem with a friend, Bavik, a derivatives trader. Despite experimenting with various futures contracts, including quarterly, monthly, weekly, and even 24-hour options, customers continued to express frustration over positions closing unexpectedly.
They sought a product that combined the benefits of spot trading with the leverage offered by derivatives exchanges. Delo's inquiry, "What if a future never expired?" sparked a pivotal conversation. Bavik's response, "Mathematically, it would be worth infinity," highlighted the technical challenges, but also led to a potential solution: charging traders an overnight rate, akin to LIBOR in traditional finance. This idea prompted Delo to create the bitcoin overnight rate, paving the way for one of the most influential financial innovations of the 21st century.
The perpetual swap, launched in May 2016, introduced a novel mechanism: a futures contract with no expiry date, anchored to the spot price through a daily funding rate. This design allowed longs and shorts to interact dynamically, with BitMEX taking no commission.
The funding rate, initially derived from third-party lending markets, was later refined to respond to market conditions on the exchange itself. This adjustment enabled the swap to maintain a stable relationship with the spot price, ensuring a more efficient and equitable trading environment.
The perpetual swap's impact was profound, transforming BitMEX into the most liquid bitcoin market globally, with $3-4 billion in daily transactions by 2017. The concentration of liquidity, facilitated by the swap's design, attracted competitors, who soon replicated the concept. Today, every major derivatives exchange offers a perpetual swap, built upon the funding rate architecture that Delo pioneered. With traditional finance regulators taking notice, the perpetual swap is poised to leave an indelible mark on the financial landscape.