Uncovering Perps: The Most Traded Financial Instrument in Crypto

Perpetual swaps, or 'perps', have revolutionized the crypto market by providing a unique trading instrument that offers leveraged exposure to asset prices without the need for ownership. With no expiration dates, these contracts have solved the issues associated with traditional futures contracts, which often resulted in confusion among retail traders due to basis and forced position closures. The brainchild of Ben Delo, perps were first introduced on BitMEX in 2016 and have since become the go-to instrument for professional traders, hedge funds, and speculators. The key to their success lies in the funding rate mechanism, which ensures that the contract price remains aligned with the underlying asset's spot price through periodic payments between traders. This self-correcting equilibrium has been widely adopted by major derivatives exchanges worldwide. Furthermore, the availability of high leverage on perp platforms has made them an attractive option for traders, although it also necessitates the use of automated liquidation systems to manage risk. As the primary venue for price discovery in crypto, perps have proven to be a durable and versatile financial product, with potential applications in traditional assets, as evidenced by the CME's exploration of listing perpetual swaps on equities.