The concept of perpetual futures has become a cornerstone of crypto's financial landscape, yet according to DRW CEO Don Wilson, much of the general understanding surrounding these products is misguided. In a series of posts, Wilson clarifies that perpetual futures, or 'perps,' are essentially futures contracts that lack an expiration date. Characteristics often linked to crypto perpetuals, such as high leverage and auto-deleveraging, are not inherent to the contracts themselves but rather a result of how certain crypto exchanges have chosen to implement them. Wilson emphasizes that the features commonly associated with perpetual futures are a function of the exchanges' design choices, not the nature of the contracts.
His comments are particularly relevant as there is a growing interest in introducing perpetual futures into regulated U.S. markets. Several market participants are exploring the launch of perpetual futures beyond the crypto sphere, although questions persist about the appropriate regulatory framework for these products.
Wilson argues that the technological capabilities of crypto exchanges, including continuous operation, digital collateral, and real-time margin calculations, have enabled the offering of products with higher leverage and unique liquidation mechanisms. However, he cautions against conflating these design choices with the fundamental nature of perpetual futures. Instead, Wilson advocates for leveraging 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 necessitate larger initial margin buffers.
In contrast, real-time settlement allows for continuous margin recalculation, enabling exchanges to require immediate collateral posting and reduce the need for substantial upfront margins while maintaining equivalent protection levels. Wilson posits that the true innovation of perpetual futures lies in their ability to eliminate the need for frequent contract rollovers, thereby reducing transaction costs, market impact, and roll slippage, and enabling positions to more closely mirror the front of the futures curve. He urges regulators to focus on the economic substance of perpetual futures rather than their legal classification, arguing that they should be treated as futures, not swaps, due to their economic nature.
Ultimately, Wilson advocates for the broader availability of perpetual futures across various markets, including commodities, securities, and crypto, seeing them as a valuable tool for price discovery and risk management rather than a crypto-specific innovation.