The idea for the perpetual swap, a financial instrument that would change the face of cryptocurrency trading, was born on a hiking trail in Hong Kong in 2015. Ben Delo, a mathematician and BitMEX co-founder, was discussing the challenges of creating a futures contract that met the needs of his customers with a friend and derivatives trader named Bavik. The problem they were trying to solve was how to create a contract that didn't expire, thereby giving traders the leverage they desired without the inconvenience of constantly rolling over contracts.
Delo's question, "What if a future never expired?" sparked a chain of events that would lead to the development of one of the most influential financial products of the 21st century. Bavik's response, "Mathematically, it would be worth infinity," highlighted the technical challenges of creating such a product, but also paved the way for a solution.
The answer lay in charging traders an overnight rate, similar to the LIBOR in traditional finance, to balance the contract's value. However, this rate didn't exist for bitcoin at the time, prompting Delo to create it. The perpetual swap, launched in May 2016, was a futures contract with no expiry date, anchored to the spot price through a daily funding rate. The core mechanic was straightforward: longs paid shorts, or vice versa, depending on whether the swap was trading above or below spot.
The early funding rate was derived from third-party lending markets but eventually had to be dynamically adjusted to reflect the demand on BitMEX. This adjustment led to the development of a dynamic funding rate mechanism, which looked inward at how the swap was trading rather than relying on external markets.
The solution involved measuring the gap between the swap and spot prices over an eight-hour window, treating it as an implied basis, and back-calculating the annualized rate from it. This rate was then charged at the end of the next eight-hour window, creating a dynamic equilibrium that kept the swap price aligned with the spot price. The perpetual swap's success was rapid, with BitMEX becoming the most liquid bitcoin market by 2017, processing $3-4 billion daily. The concentration of liquidity was a direct result of the swap's design, which consolidated market maker capital into one instrument.
Competitors took notice, and soon every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture Delo had created. The product's impact extends beyond the crypto space, with traditional finance regulators now taking notice.
The CFTC is reportedly making room for perpetual swaps under its framework, and there's speculation that the CME could eventually list them on equities. For Delo, this is the ultimate validation of an idea born on a Hong Kong hiking trail, one that started as a question about how to solve a problem for his customers and evolved into a financial innovation that could change the face of trading forever.