The Groundbreaking Story of How a Hong Kong Hike Revolutionized Crypto Trading Forever

The concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, BitMEX's co-founder and a mathematician, was discussing a pressing issue with a friend named Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, including quarterly, monthly, weekly, 48-hour, and 24-hour contracts, but none of them met customer demands. Customers complained about their positions being closed without warning, and they desired a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo posed a question: 'What if a future never expired?' Bavik's response was that it would be mathematically worth infinity, as the value of a futures contract is partly derived from the time remaining until expiry and the cost of carrying the position. However, Bavik suggested charging traders the bitcoin overnight rate, similar to LIBOR in traditional finance. Delo built this concept and, in doing so, invented one of the most significant financial products of the 21st century. To understand the perpetual swap's impact, it's essential to grasp what BitMEX aimed to achieve before becoming the most liquid bitcoin market globally. Founded in 2014 by Delo and Arthur Hayes, the exchange initially targeted institutional hedgers, but it eventually attracted sophisticated retail traders seeking high leverage and speculation opportunities. By October 2015, BitMEX offered 100x leverage, thanks to Delo's real-time margining system. The issue with futures contracts, even short-dated ones, is the basis premium, which confused many in the crypto space at the time. BitMEX's customers struggled to comprehend why bitcoin prices were higher on the exchange, and the company had to explain the concept of shorting. The perpetual swap, launched in May 2016, was designed to address these issues. It 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 funding rate was initially derived from third-party lending markets but was later adjusted to a dynamic mechanism that looked inward at the swap's trading activity. This approach allowed market makers to anchor the swap's price back to the spot price, creating a dynamic equilibrium. The perpetual swap's success was unprecedented, with BitMEX becoming the most liquid bitcoin market by 2017. The exchange processed $3-4 billion daily, and the swap was at the center of it all. The product's design concentrated liquidity, making it more attractive to traders. Competitors took notice, and eventually, every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture that Delo had developed. The fact that other exchanges have copied the swap validates its financial innovation, with Delo estimating that it now generates $40-50 trillion in turnover annually. BitMEX chose not to patent the perpetual swap, focusing instead on building and improving the product. Now, a decade later, the product is gaining attention from traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. For Delo, this prospect is the ultimate validation of the concept that started as a question on a hillside above Hong Kong.