In 2015, during a hike in Hong Kong, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived. Ben Delo, BitMEX's co-founder and a mathematician, was on a hike with his friend Bavik, a derivatives trader, grappling with a problem that had been plaguing him for months. BitMEX had experimented with various futures contracts, including quarterly, monthly, weekly, 48-hour, and even 24-hour contracts, but none of them worked as intended.
Customers complained about their positions closing unexpectedly, seeking a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo asked, "What if a future never expired?" Bavik's immediate response was, "Mathematically, it would be worth infinity." Although technically correct, Bavik proposed a solution: charge traders the bitcoin overnight rate. However, Delo was unaware of such a rate, prompting him to create it.
This innovation led to the development of one of the most significant financial products of the 21st century. To understand the perpetual swap's impact, it's essential to comprehend what BitMEX aimed to achieve before becoming the most liquid bitcoin market worldwide.
Founded in 2014 by Delo and Arthur Hayes, the exchange initially targeted institutional hedgers, but it ultimately attracted sophisticated retail traders seeking high leverage and speculation opportunities. By Halloween 2015, BitMEX offered 100x leverage, thanks to Delo's real-time margining system. The issue with futures contracts, even short-dated ones, was the basis premium, which confused many in the crypto space.
BitMEX's customers struggled to understand why bitcoin prices were higher on the exchange, and the concept of shorting was unfamiliar to them. The perpetual swap, launched in May 2016, addressed these issues with a straightforward mechanism: a futures contract with no expiry date, anchored to the spot price through a daily funding rate. Initially, the funding rate was derived from third-party lending markets, but it eventually became dynamic, looking inward at the swap's trading activity. This solution allowed market makers to anchor the swap's price back to the spot price, creating a dynamic equilibrium.
The funding rate mechanism is now used by every major derivatives exchange globally. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core. The concentration of liquidity was a result of the swap's design, which consolidated market maker capital into a single instrument. Competitors took notice, and eventually, every major exchange in crypto offered its own perpetual swap, built on Delo's funding rate architecture.
Delo believes that the fact that every other exchange has copied the swap validates its status as a financial innovation, with an estimated $40-50 trillion in annual turnover. BitMEX chose not to patent the perpetual swap, focusing on building instead.
Now, traditional finance regulators are taking notice, with the CFTC reportedly making room for perpetual swaps under its framework, and speculation about the CME listing them on equities. For Delo, this prospect is the final validation of the product that started as a question on a hillside above Hong Kong.