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

The concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived on a hiking trail in Hong Kong in 2015. Ben Delo, BitMEX co-founder and mathematician, was discussing a problem that had been plaguing him for months with his friend Bavik, a derivatives trader. BitMEX had tried various approaches, including quarterly, monthly, weekly, and 48-hour futures contracts, but none were successful. Customers complained that their positions were being closed without warning, and they wanted a product that offered the benefits of spot trading with the leverage of a derivatives exchange. Delo asked, 'What if a future never expired?' Bavik's response was that it would be mathematically worth infinity, but then suggested charging traders the bitcoin overnight rate. However, Delo was unaware of what that rate was, so he decided to create it. This marked the beginning of one of the most significant financial innovations of the 21st century. To understand the impact of the perpetual swap, it's essential to consider what BitMEX was trying to achieve before it became the most liquid bitcoin market globally. When Delo and Arthur Hayes founded the exchange in 2014, they focused on institutional hedgers, not retail traders. However, the institutions never came, and instead, sophisticated retail traders arrived, seeking to speculate with high leverage. BitMEX adapted, offering 100x leverage by Halloween 2015, thanks to Delo's real-time margining system. The issue with futures contracts was the basis, the premium at which a futures contract trades above the underlying asset's spot price. In traditional finance, this is well understood, but in crypto, it caused confusion. Customers would ask why bitcoin was more expensive on BitMEX, and the exchange would explain that it was due to the implied interest rate. The solution was to create a product that never expired, and Delo's conversation on the hiking trail provided the framework. The perpetual swap launched in May 2016, with a daily funding rate that anchored the price to the spot price. Initially, the funding rate was derived from third-party lending markets, but as bitcoin's price rose, the mechanism became overwhelmed. Delo had to dynamically adjust the funding rate, replacing the fixed reference point with a dynamic one that looked inward at the swap's trading activity. The solution was elegant, measuring the gap between the swap and spot price over an eight-hour window and back-calculating the annualized rate. This approach gave market makers notice of how the rate was calculated, allowing them to anchor the price back to the spot price. The funding rate mechanism is now used by every major derivatives exchange globally. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core. The concentration of liquidity was a result of the swap's design, collapsing multiple instruments into one. Competitors noticed, and eventually, every major exchange offered its own perpetual swap, built on Delo's funding rate architecture. The fact that every other exchange has copied the swap is a testament to its financial innovation, with a turnover of $40-50 trillion annually. BitMEX chose not to patent the perpetual swap, focusing on building instead. Now, traditional finance regulators are taking notice, with the CFTC reportedly making room for perpetual swaps, and speculation that the CME could list them on equities. For Delo, this is the final validation of a product that started as a question on a hillside above Hong Kong.