The concept of the perpetual swap, also known as a perpetual future, was conceived on a hiking trail in Hong Kong in 2015. Ben Delo, BitMEX co-founder and mathematician, was discussing a persistent problem with a friend, Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, but customers continued to express frustration with positions closing unexpectedly.
They desired a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo's query, "What if a future never expired?" sparked a pivotal conversation. Bavik's response, "Mathematically, it would be worth infinity," led to a discussion about charging traders the bitcoin overnight rate. However, Delo was unaware of such a rate, prompting him to create it.
This innovation would become one of the most significant financial products of the 21st century. The perpetual swap's launch in May 2016 marked a turning point for BitMEX, which had initially targeted institutional hedgers but found success with retail traders seeking high-leverage speculation.
The exchange's real-time margining system, built by Delo, enabled 100x leverage. The issue of basis, or the premium at which a futures contract trades above the spot price, was a challenge. The perpetual swap's funding rate mechanism, which looked inward at the swap's trading activity rather than external lending markets, provided an elegant solution. This dynamic equilibrium allowed market makers to anchor the swap's price to the spot price.
The product's success was unprecedented, with BitMEX becoming the most liquid bitcoin market by 2017. The concentration of liquidity was a direct result of the swap's design, which consolidated market maker capital into a single instrument. Competitors took notice, and the perpetual swap became a standard offering in the crypto derivatives market.
Delo's innovation has attracted the attention of traditional finance regulators, with the CFTC considering room for perpetual swaps under its framework. The prospect of traditional finance embracing this financial product is a testament to its validity and potential for widespread adoption.