The introduction of perpetual futures into regulated markets has sparked intense debate, with critics warning of the potential for systemic risk due to high-leverage instruments driven by retail traders. However, this criticism is misdirected, as the risk is not inherent to the perpetual futures contract itself, but rather a result of the venue's design. The true risk lies in the choices made by the venue, such as leverage caps, margin rules, funding design, and default management.
The concern is not unfounded, as past deleveraging episodes in the crypto market have been caused by a combination of factors, including macro shocks, stablecoin de-pegs, exchange outages, and oracle failures. The key factor that turns a sell-off into a systemic event is the risk transmission mechanism, typically a liquidation cascade. This cascade is often triggered by venue choices, such as a manipulable index that liquidates on false prices and auto-deleveraging that claws back profitable trades to cover a shortfall. These features are not inherent to perpetual futures.
The real question is not whether perpetuals belong in regulated markets, but how a given venue is built. Regulatory requirements are necessary to establish a baseline, including segregated funds, a registered clearing entity, and supervisory oversight.
How a venue handles a default under stress is a separate choice that varies even within the regulated perimeter. A more relevant concern is that institutions may not want perpetuals at all, as they may be seen as speculative rather than a replacement for regulated futures. However, this perspective overlooks the fact that institutions use perpetuals to hedge delta, not as a replacement for dated futures, but because that is where the liquidity is. Term structure is less relevant to delta hedging than liquidity, and many of crypto's dated futures are thinly traded, while perpetuals are the deepest, most continuously tradable delta-one instruments available.
The liquidity edge is structural, drawn in part by retail flow, and is the overlooked prize in bringing perpetuals onshore. The two halves of the debate are intertwined: the liquidity institutions want already exists, drawn in large part by retail, and what lets them use it safely is institutional-grade default management, the same thing that contains the systemic risk the critics fear.
The question was never 'are perpetuals dangerous?' but 'when the market is under stress, how does a venue handle a default?' Regulated clearing has established the standard for decades, which is also the standard that Bullish is building toward. When a liquidation's shortfall outruns the insurance fund, the backstop is to socialize losses, but the clearing model works differently, starting with the defaulter and using a pre-funded guaranty fund.
This approach breaks the chain that turns one blown-out account into a market-wide cascade, containing the failure at its source rather than transmitting it. Meeting this standard is what makes perpetuals infrastructure that institutions can use safely.