The Misguided Debate on Perpetual Futures and Systemic Risk

The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, but the criticism is misplaced. The risk is not inherent to the contract itself, but rather a result of the venue's design, including factors such as leverage caps, margin rules, and default management. The concern is not unfounded, as crypto's history of deleveraging episodes has shown that macro shocks, stablecoin de-pegs, and exchange outages can trigger a liquidation cascade. However, this cascade is often the result of venue choices, such as a manipulable index and auto-deleveraging, rather than a feature of perpetuals. The real question is not whether perpetuals belong in regulated markets, but how a given venue is built and how it handles defaults under stress. Regulatory requirements are necessary to secure the baseline, but the handling of defaults is a separate choice that varies even within regulated markets. A sharper objection to perpetuals is that institutions may not want them at all, as they are not a replacement for regulated futures due to their variable funding and basis risk. However, institutions are using perpetuals to hedge delta, not as a substitute for dated futures, but because of their liquidity. The liquidity edge of perpetuals is structural, drawn in by retail, and what lets institutions use it safely is institutional-grade default management. The debate is not about whether perpetuals are dangerous, but about how a venue handles defaults when the market is under stress. Regulated clearing has established a standard for decades, and Bullish is building towards this standard. By containing defaults at their source, rather than transmitting them to the market, perpetuals can become infrastructure that institutions can use.