The concept of perpetual futures has become a cornerstone of crypto's financial landscape, yet DRW CEO Don Wilson believes that common perceptions about them are misguided. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date.
Characteristics often associated with 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's comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets, with several exchanges exploring their launch beyond the crypto sphere. However, questions remain regarding how these products should be regulated.
Unlike traditional futures markets, crypto exchanges operate continuously and utilize digital collateral, allowing for real-time margin requirement calculations and the offer of products with higher leverage. Wilson emphasized that these design choices should not be mistaken for the inherent nature of perpetual futures. He expressed his disapproval of auto-deleveraging, stating that it is not a necessary component of perpetual futures. Instead, Wilson argued that digital payment systems provide opportunities for enhanced risk management.
Traditional clearinghouses typically calculate margins once daily, requiring market participants to post additional collateral by the next business day. This can lead to significant market movements during the waiting period, prompting clearinghouses to demand larger initial margin buffers. With real-time settlement, exchanges can recalculate margins continuously, enabling them to require traders to post collateral immediately.
This reduces the need for substantial upfront margin requirements while maintaining the same level of protection. Wilson noted that the true innovation of perpetual futures lies in their ability to eliminate the need for investors to repeatedly roll over expiring contracts.
This reduces transaction costs, market impact, and roll slippage, allowing positions to more closely track the front of the futures curve. He urged regulators to focus on the economic substance of perpetual futures rather than their legal classification, emphasizing that they should be treated as futures, not swaps, due to their economic nature. Ultimately, Wilson advocated for the broader availability of perpetual futures across various markets, including commodities, securities, and crypto, viewing them as a valuable tool for price discovery and risk management rather than a crypto-specific innovation.