The concept of perpetual futures has become a cornerstone of the cryptocurrency market, but according to DRW CEO Don Wilson, there are many misconceptions surrounding this financial product. Through a series of posts, Wilson clarified that perpetual futures, or 'perps', are essentially futures contracts that do not have an expiration date.
The characteristics commonly associated with crypto perpetuals, such as high leverage and automatic deleveraging, are a result of how certain exchanges have chosen to implement these products, rather than being inherent to the contracts themselves. Wilson's comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets. Several exchanges are exploring the possibility of launching perpetual futures beyond the realm of cryptocurrency, although there are still questions regarding how these products should be regulated and whether they fit within existing frameworks. Unlike traditional futures markets, cryptocurrency exchanges operate continuously and utilize digital collateral, allowing for real-time calculation of margin requirements.
This has enabled exchanges to offer products with higher leverage and alternative liquidation mechanisms. However, Wilson emphasized that these design choices should not be mistaken for the inherent nature of perpetual futures.
Wilson expressed his disapproval of automatic deleveraging, stating that it is not a necessary component of perpetual futures. Instead, he argued that digital payment systems provide opportunities for improved risk management.
Traditional clearinghouses typically calculate margin on a daily basis, requiring market participants to post additional collateral by the following business day. In contrast, real-time settlement allows exchanges to recalculate margin continuously, reducing the need for large upfront margin requirements while maintaining the same level of protection.
According to Wilson, the true innovation of perpetual futures lies in their ability to eliminate the need for investors to repeatedly roll over expiring contracts, thereby reducing transaction costs and allowing positions to more closely track the front of the futures curve. Wilson urged regulators to focus on the economic substance of perpetual futures rather than their legal labels, emphasizing that they should be treated as futures contracts rather than swaps. He concluded by advocating for the availability of perpetual futures across a broader range of markets, including commodities, securities, and cryptocurrency, and argued that they should be viewed as a tool for price discovery and risk management rather than a cryptocurrency-specific innovation.