In 2015, a hike in Hong Kong's countryside led to the creation of the perpetual swap, a financial instrument that would change the face of cryptocurrency trading. Ben Delo, BitMEX co-founder, was discussing a problem with a friend, Bavik, a derivatives trader. They were trying to find a solution to the issue of futures contracts expiring and causing customer positions to close unexpectedly.
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 balance it out. Delo built the system, and in doing so, invented a groundbreaking financial product. The perpetual swap was launched in May 2016, with a daily funding rate that kept the contract price aligned with the spot price. Initially, the funding rate was derived from external lending markets, but as demand for long exposure grew, the mechanism had to be adjusted to reflect the market conditions on BitMEX.
The solution was to look inward and measure the gap between the swap and spot prices over an eight-hour window, using this as an implied basis to calculate the funding rate. This dynamic equilibrium allowed market makers to anchor the swap price back to the spot price. The perpetual swap became a huge success, with BitMEX becoming the most liquid bitcoin market in the world, processing $3-4 billion a day. The product's design concentrated liquidity, allowing traders to consolidate their capital into one instrument.
Competitors took notice, and soon every major exchange in crypto was offering its own perpetual swap. Delo believes that the fact that every other exchange has copied the swap is a testament to its financial innovation, with an estimated $40-50 trillion in turnover each year. The perpetual swap is now attracting the attention of traditional finance regulators, with the CFTC reportedly making room for it under its framework, and speculation that the CME could list it on equities. For Delo, this is the final validation of a product that started as a question on a hillside above Hong Kong.