The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments will destabilize the market. However, this criticism is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design. The key factors that contribute to systemic risk are leverage caps, margin rules, index construction, and default management, which are all choices made by the venue.
The concern about systemic risk is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of macro shocks, stablecoin de-pegs, exchange outages, oracle failures, over-leverage, and thin liquidity. However, it is the liquidation cascade that turns a sell-off into a systemic event, and this is usually caused by venue choices such as manipulable indices and auto-deleveraging.
The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is designed. Regulatory requirements are necessary to establish a baseline, including segregated funds, a registered clearing entity, and supervisory oversight.
How a venue handles a default under stress is a separate choice, and it varies even within the regulated perimeter. A more valid concern is that institutions may not want perpetual futures at all, as they are not a replacement for regulated futures. However, institutions are using perpetual futures to hedge delta, not as a substitute for dated futures, but because that is where the liquidity is.
Term structure is less relevant to delta hedging than liquidity, and many of crypto's dated futures are thinly traded, while perpetuals are the deepest and most continuously tradable delta-one instruments available. The liquidity edge of perpetuals is structural, drawn in by retail, and what allows institutions to use it safely is institutional-grade default management. The question was never whether perpetuals are dangerous, but rather how a venue handles a default when the market is under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards.
When a liquidation's shortfall outruns the insurance fund, the backstop is to socialize losses, but the clearing model works differently, starting with the defaulter and using a pre-funded guaranty fund. This design breaks the chain that turns one blown-out account into a market-wide cascade, containing the risk at its source rather than transmitting it.
Meeting this standard makes perpetuals infrastructure that institutions can use, while missing it creates the hazard that critics describe.