The Groundbreaking Story of How a Hong Kong Hike Revolutionized Crypto Trading

In 2015, during a hike in Hong Kong, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived. Ben Delo, BitMEX co-founder and mathematician, was discussing a problem that had been bothering him for months with his friend Bavik, a derivatives trader. BitMEX had been experimenting with various types of futures contracts, including quarterly, monthly, weekly, 48-hour, and 24-hour contracts, but none were successful. Customers were complaining that their positions were being closed without warning, and 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. However, he also suggested charging traders the bitcoin overnight rate, similar to how LIBOR is used in traditional finance. The issue was that this rate did not exist at the time. Delo decided to create it, which led to the invention of one of the most significant financial products of the 21st century. To understand the impact of the perpetual swap, it is essential to consider what BitMEX was trying to achieve before it became the most liquid bitcoin market in the world. When Delo and Arthur Hayes founded the exchange in 2014, they were focused on institutional hedgers, not retail traders. However, the institutions never came, and instead, the exchange attracted sophisticated retail traders who wanted to speculate with high leverage. BitMEX responded by offering 100x leverage, made possible by a real-time margining system built by Delo. The problem with futures contracts, even short-dated ones, is the basis, which is the premium at which a futures contract trades above the spot price of the underlying asset. In traditional finance, this is well understood, but in crypto, in 2015, it was confusing. Customers were complaining that bitcoin was expensive on the exchange, and Delo would explain that they could short it. The perpetual swap launched in May 2016 with a simple mechanic: 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. The early funding rate was derived from third-party lending markets, but it eventually had to be adjusted dynamically to reflect the demand for long exposure on BitMEX. The solution was to look inward at how the swap was trading, rather than outward at external lending markets. The exchange began measuring the gap between the swap and spot prices over an eight-hour window and back-calculating the annualized rate from it. This rate would then be charged at the end of the next eight-hour window. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion a day, and the perpetual swap was at the center of it all. The product's design led to a concentration of liquidity, and competitors noticed. Every major exchange in crypto now offers its own perpetual swap, each built on the funding rate architecture that Delo created. The fact that every other exchange has copied the swap is a testament to its financial innovation. BitMEX chose not to patent the perpetual swap, and now, a decade later, the product is attracting the attention of traditional finance regulators. The CFTC is reportedly making room for perpetual swaps under its framework, and there is speculation that the CME could eventually list them on equities. For Delo, this prospect is the final validation of something that started as a question on a hillside above Hong Kong.