In 2015, a conversation on a Hong Kong hiking trail between Ben Delo, BitMEX co-founder, and his friend Bavik, a derivatives trader, led to the creation of the perpetual swap, also known as a perpetual future or 'perp'. The problem they were trying to solve was that customers were complaining about their positions closing without warning due to expiring futures contracts.
Delo asked, 'What if a future never expired?' Bavik responded that it would be worth infinity from a mathematical standpoint, but then suggested charging traders the bitcoin overnight rate to solve the issue. However, Delo realized that such a rate did not exist at the time, so he decided to create it.
This innovation led to the development of one of the most significant financial products of the 21st century. Initially, BitMEX was designed for institutional hedgers, but it eventually attracted retail traders seeking high leverage for speculation. By offering 100x leverage and a real-time margining system, the exchange gained popularity.
The issue with traditional futures contracts was the basis, or the premium at which a futures contract trades above the spot price of the underlying asset. To address this, Delo invented the funding rate mechanism, which has since been adopted by major derivatives exchanges worldwide.
The perpetual swap was launched in May 2016 and became a huge success, with BitMEX becoming the most liquid bitcoin market in the world by 2017. The exchange's daily trading volume reached $3-4 billion, with the perpetual swap at its core.
The product's success can be attributed to its ability to consolidate liquidity into one instrument, resulting in a more liquid market with tighter spreads. Competitors took notice, and soon every major exchange in crypto offered its own perpetual swap.
Delo believes that the fact that other exchanges have copied the swap is a testament to its financial innovation. With the product now attracting the attention of traditional finance regulators, Delo sees this as the final validation of the perpetual swap's significance. The CFTC is reportedly making room for perpetual swaps under its framework, and there is speculation that the CME could eventually list them on equities. Delo is confident that once traditional finance recognizes the benefits of this financial product, it will have a profound impact.