The Genesis of a Revolutionary Trading Concept: How a Hong Kong Hike Changed Crypto Forever

The idea for 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 co-founder and mathematician, was discussing a nagging issue with a friend, Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, but customers kept complaining about positions closing unexpectedly. They wanted a product that mimicked spot trading but offered the leverage of a derivatives exchange. Delo asked, 'What if a future never expired?' Bavik replied that it would be mathematically worth infinity, but suggested charging traders the bitcoin overnight rate to solve the problem. Delo built this concept into a product, inventing one of the most significant financial products of the 21st century. To understand the perpetual swap's impact, it's essential to consider BitMEX's origins. Founded in 2014 by Delo and Arthur Hayes, the exchange aimed to provide institutional hedgers with a platform to manage their bitcoin exposure. However, instead of institutions, the exchange attracted sophisticated retail traders seeking high leverage and large positions. By October 2015, BitMEX offered 100x leverage, thanks to Delo's real-time margining system. The issue with traditional futures contracts was the basis premium, which confused many crypto traders. Delo's solution was to create a perpetual swap with no expiry date, anchored to the spot price through a daily funding rate. This mechanism allowed longs and shorts to be balanced, with BitMEX taking no cut. The early funding rate was derived from third-party lending markets but eventually became dynamic, looking inward at the swap's trading activity rather than external markets. This approach allowed market makers to anchor the swap's price to the spot price, creating a dynamic equilibrium. The perpetual swap launched in May 2016 and became a huge success, with BitMEX processing $3-4 billion daily by 2017. The concentration of liquidity was a result of the swap's design, which consolidated market maker capital into one instrument. Competitors noticed, and soon every major exchange in crypto offered its own perpetual swap, built on Delo's funding rate architecture. The product's success has attracted traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. Delo believes that once traditional finance recognizes the benefits of this financial product, it will be impressive. BitMEX chose not to patent the perpetual swap, focusing on building and letting the market decide its value.