The concept of perpetual futures has become a cornerstone of cryptocurrency financial products, yet according to DRW CEO Don Wilson, much of the general understanding surrounding them is misguided. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date. Characteristics often associated with crypto perpetuals, such as high leverage and auto-deleveraging, are not inherent to the contracts themselves but rather a result of how some crypto exchanges have chosen to implement them.
Wilson emphasized that the features people commonly attribute to 'perps' have little to do with the contract's fundamental nature. His comments come at a time when there is growing interest in introducing perpetual futures into regulated U.S. markets, with several exchanges exploring their launch beyond the crypto sphere.
However, questions persist about how these products should be regulated and whether they align with existing futures or swaps frameworks. Recently, Kalshi submitted a proposal to regulators to expand its offerings to include precious metals, following a significant surge in perps trading after its launch.
Unlike traditional futures markets, crypto exchanges operate continuously, utilizing digital collateral and real-time margin requirement calculations. These technological advancements have enabled exchanges to offer products with higher leverage and alternative liquidation mechanisms. Wilson, however, distinguishes these design choices from the essence of perpetual futures, expressing his disapproval of auto-deleveraging and suggesting it is not a necessary component of perps.
Instead, he advocates for the potential of digital payment systems to enhance risk management. Traditional clearinghouses typically calculate margins once daily, requiring market participants to post additional collateral by the next business day, which can lead to significant market movements and the need for larger initial margin buffers. In contrast, real-time settlement allows for continuous margin recalculation, enabling exchanges to demand immediate collateral posting from traders and thereby reducing the necessity for substantial upfront margin requirements while maintaining equivalent protection levels. Wilson underscores that the decision to translate these efficiencies into higher leverage is a business choice, not an intrinsic feature of perpetual futures.
He identifies the true innovation of perpetual futures as their ability to eliminate the need for repeated contract rolls, thereby reducing transaction costs, market impact, and roll slippage, while enabling positions to more closely mirror the front of the futures curve. Wilson urges regulators to focus on the economic substance of perpetual futures rather than their legal classification, arguing that they should not be treated as swaps merely because they lack an expiration date, as they are economically equivalent to futures. He concludes by advocating for the broader availability of perpetual futures across various markets, including commodities, securities, and crypto, emphasizing their potential as tools for price discovery and risk management beyond their current association with crypto innovations.