The concept of perpetual futures has become a cornerstone of the cryptocurrency market, but according to Don Wilson, CEO of DRW, many common perceptions about them are misguided. In a series of posts, Wilson explained that perpetual futures, also known as 'perps,' are essentially futures contracts without an expiration date.
The characteristics often associated with crypto perpetuals, such as high leverage and auto-deleveraging, are a result of how some exchanges have chosen to implement these products, rather than inherent features of the contracts themselves. Wilson's comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets. Several exchanges are exploring the launch of perpetual futures beyond the crypto space, but there are still questions about how these products should be regulated.
Unlike traditional futures markets, cryptocurrency exchanges operate continuously and utilize digital collateral, allowing for real-time margin requirement calculations. Wilson argues that these technological differences have enabled exchanges to offer products with higher leverage, but this should not be confused with the nature of perpetual futures.
Instead, he believes that digital payment systems can improve risk management by enabling real-time settlement and reducing the need for large initial margin buffers. The true innovation of perpetual futures, according to Wilson, lies in their ability to eliminate the need for investors to repeatedly roll over expiring contracts, thereby reducing transaction costs and allowing positions to more closely track the market. Wilson urges regulators to focus on the economic substance of perpetual futures rather than their legal classification, and to make them available across a broader range of markets, including commodities, securities, and cryptocurrency.