In 2015, on a Hong Kong hiking trail, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was born. Ben Delo, BitMEX co-founder and mathematician, was walking with Bavik, a derivatives trader, grappling with a problem that had been bothering him for months. BitMEX had tried various approaches: quarterly, monthly, weekly, and even 24-hour futures contracts. However, customers kept complaining that their positions were closing unexpectedly.
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 responded, 'Mathematically, it would be worth infinity.' Technically, he was correct, as a futures contract's value is partly derived from the time remaining until expiry and the cost of carrying the position. Remove the expiry date, and that carrying cost compounds indefinitely, making the theoretical value infinite. However, Bavik suggested charging traders the bitcoin overnight rate, similar to LIBOR in traditional finance.
Delo built it, inventing one of the most significant financial products of the 21st century. To understand the perpetual swap's impact, it's essential to comprehend what BitMEX was trying to achieve before becoming the most liquid bitcoin market. When Delo and Arthur Hayes founded the exchange in 2014, they focused on institutional hedgers, not retail traders.
Hayes had worked at Deutsche Bank, while Delo built high-frequency trading systems at JP Morgan. Their thesis was that bitcoin miners and payment companies needed a way to hedge their exposure, and BitMEX would provide the infrastructure. However, institutions never came; instead, sophisticated retail traders arrived, seeking speculation and high leverage.
BitMEX listened and offered 100x leverage by Halloween 2015, made possible by Delo's real-time margining system. The issue with futures, even short-dated ones, is basis, the premium at which a futures contract trades above the spot price. In traditional finance, this is well understood, but in crypto, in 2015, it confused almost everyone. BitMEX kept shortening the expiry of its listed futures contracts, but customers wanted a leveraged product that never expired.
Delo's hiking trail conversation gave him the framework to build one. The perpetual swap launched in May 2016 with a straightforward core 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. BitMEX took no cut; the rate was a balancing mechanism.
The early funding rate was derived from third-party lending markets, primarily Bitfinex. However, as Bitcoin rose in 2016 and 2017, demand for long exposure on BitMEX overwhelmed the funding mechanism.
The swap started trading at a persistent premium to spot, causing the contract price to drift away from the actual price of bitcoin. Delo had to dynamically adjust the funding rate, replacing the fixed reference point with a dynamic one that looked inward at how the swap was trading. The solution was elegant: measuring the gap between the swap and spot over an eight-hour window, treating it as an implied basis, and back-calculating the annualized rate. This rate would be charged at the end of the next eight-hour window, giving market makers notice and creating a dynamic equilibrium.
By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its center. The concentration of liquidity was a product of the swap's design, collapsing multiple instruments into one.
Competitors noticed, and every major exchange in crypto now offers its own perpetual swap, built on the funding rate architecture Delo created. BitMEX chose not to patent the perpetual swap, deciding to focus on building instead. Now, a decade later, the product is attracting traditional finance regulators' attention, with the CFTC reportedly making room for perpetual swaps and speculation that the CME could list them on equities. For Delo, this prospect is the final validation of something that started as a question on a hillside above Hong Kong.