The concept of perpetual futures has become a cornerstone of crypto finance, but according to Don Wilson, CEO of DRW, there are many misconceptions surrounding this product. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date. The characteristics commonly associated with crypto perpetuals, such as high leverage and auto-deleveraging, are not inherent to the contracts themselves but rather a result of how some crypto exchanges have chosen to implement them.
Wilson emphasized that the features of perpetual futures are often misunderstood and that most of what people think they know about 'perps' has nothing to do with the contract itself. As interest in introducing perpetual futures to regulated U.S.
markets grows, Wilson's comments are particularly relevant. Several exchanges are exploring the launch of perpetual futures beyond the crypto space, but questions remain about 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.
Wilson argued that these technological differences have enabled exchanges to offer products with higher leverage and alternative liquidation mechanisms, but he cautioned against confusing these design choices with the nature of perpetual futures themselves. Wilson expressed his disapproval of auto-deleveraging, stating that it is not a necessary component of perpetual futures. Instead, he suggested that digital payment systems can enhance risk management by facilitating real-time settlement and continuous margin recalculation.
This approach can reduce the need for large upfront margin buffers while maintaining the same level of protection. Wilson also highlighted the innovation of perpetual futures in eliminating the need for repeated contract rollovers, thereby reducing transaction costs and 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, arguing that they should be treated as futures rather than swaps simply because they lack an expiration date. 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.