The introduction of perpetual futures into regulated markets has sparked a heated debate, with critics arguing that these high-leverage instruments pose a significant systemic risk. However, this criticism is misdirected, as the true source of risk lies not in the contract itself, but in the design of the venue on which it is traded. The risk is determined by factors such as leverage caps, margin rules, and default management, which are inherent to the venue, not the contract.
The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages. Nevertheless, it is the liquidation cascade, which is often the result of venue choices such as manipulable indexes and auto-deleveraging, that turns a sell-off into a systemic event.
The key question is not whether perpetual futures belong in regulated markets, but rather how a given venue is designed. Regulatory requirements, such as segregated funds and a registered clearing entity, are essential for establishing a baseline level of security. However, the way a venue handles defaults under stress is a separate issue, and it can vary even within regulated markets. A more significant objection to perpetual futures is that institutions may not want them at all, as they are often seen as speculative rather than a replacement for regulated futures.
Nevertheless, institutions are using perpetual futures to hedge delta, not as a substitute for dated futures, but because they offer the necessary liquidity. The liquidity edge of perpetual futures is structural, and it is drawn in part by retail flow. The design that attracts this flow concentrates liquidity in perpetual futures, making them the deepest and most continuously tradable delta-one instruments available. The overlooked benefit of bringing perpetual futures onshore is the creation of a deep and durable pool of liquidity in the instruments that hedging desks want.
The two halves of the debate are interconnected, as the liquidity that institutions want already exists, drawn in part by retail, and what allows them to use it safely is institutional-grade default management. The question is not whether perpetual futures are dangerous, but rather how a venue handles defaults when the market is under stress.
Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. When a liquidation's shortfall exceeds the insurance fund, the backstop is to socialize losses through auto-deleveraging. In contrast, the clearing model starts with the defaulter, whose own margin and fund contribution absorb the first loss, and the position is worked off through the order book or auctioned to other clearing members. 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.
By meeting this standard, perpetual futures can become infrastructure that institutions can use, and the risk of a systemic event is significantly reduced.