The concept of the perpetual swap, also known as a perpetual future or 'perp,' was born in 2015 on a hiking trail in Hong Kong. Ben Delo, a mathematician and co-founder of BitMEX, was discussing a problem that had been plaguing him for months with his friend Bavik, a derivatives trader. BitMEX had been experimenting with various futures contracts, including quarterly, monthly, weekly, 48-hour, and 24-hour contracts, but none were working as intended. Customers were complaining that their positions were being closed without warning, and they wanted a product that resembled spot trading but offered the leverage of a derivatives exchange.
Delo asked, 'What if a future never expired?' Bavik's response was that mathematically, it would be worth infinity. However, he also proposed a solution: charge traders the bitcoin overnight rate, similar to how LIBOR is used in traditional finance. Delo decided to build it, and in doing so, he created one of the most significant financial products of the 21st century.
To understand the impact of the perpetual swap, it's essential to consider what BitMEX was trying to achieve before it became the most liquid bitcoin market in the world. When Delo and Arthur Hayes founded the exchange in 2014, they focused on institutional hedgers, but instead, they attracted sophisticated retail traders who wanted to speculate with high leverage. BitMEX listened and began offering 100x leverage by Halloween 2015, made possible by a real-time margining system built by Delo. The issue with futures contracts, even short-dated ones, is the basis premium, which confused many in the crypto space in 2015.
BitMEX's customers would often ask why bitcoin was more expensive on their exchange, and the response would be to short it, which was a foreign concept to many. The exchange continued to shorten the expiry of its listed futures contracts, but customers kept asking for a leveraged product that never expired. Delo's conversation on the hiking trail provided the framework to build one.
The perpetual swap launched in May 2016 with a straightforward mechanic: a futures contract with no expiry date, anchored to the spot price through a daily funding rate. Longs paid shorts, or vice versa, depending on whether the swap was trading above or below spot. Initially, the funding rate was derived from third-party lending markets, but it eventually became dynamic, looking inward at how the swap was trading rather than outward at external markets. The solution was elegant, and it gave market makers notice of how the rate was calculated, allowing them to anchor the swap back down to the spot price.
This funding rate mechanism is now used by every major derivatives exchange in the world. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion a day, with the perpetual swap at its center. The concentration of liquidity was a result of the swap's design, which collapsed multiple contracts into one instrument. Competitors noticed, and eventually, every major exchange in crypto offered its own perpetual swap, each built on the funding rate architecture that Delo had created.
The fact that every other exchange has copied the swap is a testament to its financial innovation, with Delo estimating that it now facilitates $40-50 trillion in turnover annually. BitMEX chose not to patent the perpetual swap, instead focusing on building and letting the market validate its product. Now, a decade later, the product is attracting the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. For Delo, this is the final validation of a concept that started as a question on a hillside above Hong Kong, asked by someone who had grown tired of watching his customers complain about positions that kept disappearing.