The introduction of perpetual futures to regulated markets has sparked a heated debate, with critics warning of the potential for systemic risk due to high-leverage, retail-driven instruments. However, this criticism is misguided, as the risk is inherent to the venue on which the perpetuals are traded, not the contract itself. The venue's design, including leverage caps, margin rules, and default management, determines the level of risk. The concern is not unfounded, as past deleveraging episodes in the crypto market have been caused by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages.
Nevertheless, the risk transmission mechanism, often in the form of a liquidation cascade, is typically the culprit behind systemic events. This cascade can be mitigated by a well-designed venue, with features such as a robust index, effective auto-deleveraging, and a reliable default management system. The real question is not whether perpetuals belong in regulated markets, but rather how a given venue is constructed. Regulatory requirements, including segregated funds, a registered clearing entity, and oversight, are essential to establishing a secure baseline.
The way a venue handles defaults under stress is a separate consideration, and it can vary even within regulated markets. A more significant objection to perpetuals is that institutions may not want them, as they are often seen as speculative rather than a replacement for regulated futures. However, institutions are using perpetuals to hedge delta, taking advantage of the liquidity they provide, rather than as a substitute for dated futures.
The liquidity edge of perpetuals is structural, drawn in by retail investors who are attracted to the no-expiry, continuously tradable nature of these instruments. This liquidity is a valuable asset for hedging desks, which prioritize execution over elegance. The debate surrounding perpetuals is, in fact, two-sided, with the liquidity institutions want already existing, drawn in part by retail. What allows them to use it safely is institutional-grade default management, which is the same factor that contains systemic risk.
The question is not whether perpetuals are dangerous, but rather how a venue handles defaults when the market is under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is working towards, having filed with the CFTC to operate as a regulated contract market and clearinghouse. When a liquidation's shortfall exceeds the insurance fund, the backstop is to socialize losses through auto-deleveraging, forcing the closure of offsetting profitable positions at an off-market price. In contrast, the clearing model starts with the defaulter, whose margin and fund contribution absorb the initial loss, followed by the position being worked off through the order book or auctioned to other clearing members.
A pre-funded guaranty fund, sized to regulated clearinghouse standards, provides an additional layer of protection. While this approach does not completely eliminate risk, it breaks the chain that turns a single default into a market-wide cascade, containing the failure at its source rather than transmitting it. Meeting this standard is what makes perpetuals a viable infrastructure for institutions to use, rather than a hazard. The design of the venue is the key factor, not the perpetuals themselves.