How a Chance Encounter on a Hong Kong Hike Revolutionized Crypto Trading

In 2015, a casual conversation between Delo and a friend, Bavik, a derivatives trader, on a hiking trail in Hong Kong, laid the groundwork for the creation of the perpetual swap, also known as a perpetual future or 'perp'. This innovative financial product was the brainchild of Delo, a mathematician and co-founder of BitMEX, who had been grappling with the challenges of creating a futures contract that met the needs of the company's customers. The perpetual swap was designed to mimic the characteristics of a spot trade while offering the leverage of a derivatives exchange, thereby addressing the long-standing issue of customers' positions being closed without warning due to expiring contracts. The idea for the perpetual swap was born when Delo posed a question to Bavik: 'What if a future never expired?' Bavik's response, 'Mathematically, it would be worth infinity,' sparked a series of discussions that ultimately led to the development of a solution, which involved charging traders an overnight rate, similar to the LIBOR in traditional finance. However, Delo soon realized that the bitcoin overnight rate did not exist, prompting him to create it. The perpetual swap was launched in May 2016, with a core mechanism that featured 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, with BitMEX taking no cut. The early funding rate was derived from third-party lending markets, but it eventually became clear that a dynamic approach was needed to adjust the funding rate in response to market conditions. Delo's solution was to look inward at how the swap was trading, rather than outward at external lending markets, and to measure the gap between the swap and spot prices over an eight-hour window. This approach allowed for a dynamic equilibrium, where market makers could adjust their positions in response to changes in the funding rate. The perpetual swap's impact on the crypto market was significant, with BitMEX becoming the most liquid bitcoin market in the world by 2017, processing $3-4 billion in daily transactions. The product's success can be attributed to its ability to consolidate liquidity, resulting in a more liquid market with tighter spreads. Competitors took notice, and soon, every major exchange in crypto was offering its own perpetual swap, built on the funding rate architecture that Delo had pioneered. Today, the perpetual swap is considered one of the most successful financial products in history, with an estimated $40-50 trillion in annual turnover. As traditional finance regulators begin to take notice of the product, Delo believes that its adoption will be a testament to its value and a validation of the innovative spirit that drove its creation.