It all began in 2015, on a hiking trail in Hong Kong, where the concept of a perpetual swap, also known as a perpetual future or 'perp,' was born. Ben Delo, BitMEX co-founder and mathematician, was discussing a persistent problem with a friend named Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, but customers continued to complain about their positions 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's response was that it would be mathematically worth infinity, as the carrying cost would compound indefinitely without an expiry date.
However, Bavik suggested charging traders the bitcoin overnight rate to address this issue. The problem was that such a rate did not exist at the time, so Delo created it. This invention would become one of the most significant financial products 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. When Delo and Arthur Hayes founded the exchange in 2014, they focused on institutional hedgers, not retail traders. Hayes had worked at Deutsche Bank, and Delo had built high-frequency trading systems at JP Morgan. Their goal was to provide professional infrastructure for bitcoin miners and payment companies to hedge their exposure.
However, instead of institutions, the exchange attracted sophisticated retail traders who wanted to speculate with high leverage. BitMEX adapted, offering 100x leverage by Halloween 2015, made possible by Delo's real-time margining system.
The issue with futures contracts was the basis, the premium at which a futures contract trades above the spot price. This concept was unfamiliar in crypto, causing confusion among customers.
Delo's conversation on the hiking trail led to the creation of a framework for a product that would address these issues. The perpetual swap launched in May 2016, with a core mechanic that was straightforward: 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.
Initially, the funding rate was derived from third-party lending markets, but it eventually became dynamic, looking inward at how the swap was trading rather than outward at external markets. The solution was elegant, measuring the gap between the swap and spot over an eight-hour window and back-calculating the annualized rate. This funding rate mechanism is now used by every major derivatives exchange. 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 result of the swap's design, collapsing multiple contracts into one instrument. Competitors noticed, and soon every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture that Delo had created. The fact that every other exchange has copied the swap is a testament to its financial innovation.
Delo believes that once traditional finance recognizes the benefits of this product, it will be impressive. Now, a decade later, the product is attracting the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework.