The concept of perpetual futures has become a cornerstone of the crypto financial landscape, but according to DRW CEO Don Wilson, much of the common understanding surrounding them is misguided. In a series of posts, Wilson emphasized that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date.
Characteristics often associated with crypto perpetuals, such as high leverage and auto-deleveraging, are not inherent to the contracts themselves but rather a result of how some crypto exchanges have chosen to implement them. Wilson's comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets, with several exchanges and market participants exploring their launch beyond the crypto sphere. However, questions persist about how these products should be regulated and whether they fit within existing frameworks. Unlike traditional futures markets, crypto exchanges operate continuously, utilize digital collateral, and can calculate margin requirements in real time, allowing for higher leverage and alternative liquidation mechanisms.
Wilson argues that these design choices should not be confused with the fundamental nature of perpetual futures. Instead, he believes that digital payment systems offer opportunities to enhance risk management.
Traditional clearinghouses typically calculate margin once a day, requiring market participants to post additional collateral by the following business day. In contrast, real-time settlement enables exchanges to recalculate margin continuously, reducing the need for large upfront margin requirements while maintaining the same level of protection.
Wilson contends that the true innovation of perpetual futures lies in their ability to eliminate the need for investors to repeatedly roll expiring contracts, thereby reducing transaction costs and allowing positions to more closely track the front of the futures curve. He urges regulators to focus on the economic substance of perpetual futures rather than their legal labels, arguing that they should be treated as futures, not swaps, and made available across a broader range of markets, including commodities, securities, and crypto, as a tool for price discovery and risk management.