The concept of perpetual futures has become a staple in the world of cryptocurrency, but according to DRW CEO Don Wilson, there are many misconceptions surrounding this financial product. In a series of posts, Wilson clarified that perpetual futures, or 'perps', are simply futures contracts that do not have an expiration date.
The characteristics often associated with crypto perpetuals, such as high leverage and auto-deleveraging, are a result of how some crypto exchanges have chosen to implement these products, rather than inherent features of the contracts themselves. Wilson's comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets. Several exchanges and market participants are exploring the possibility of launching perpetual futures beyond the crypto space, but questions remain about how these products should be regulated.
Unlike traditional futures markets, crypto exchanges operate continuously and use digital collateral, allowing for real-time calculation of margin requirements. Wilson argued that these technological differences have enabled exchanges to offer products with higher leverage and alternative liquidation mechanisms, but that these design choices should not be confused with the concept of perpetual futures itself.
Instead, Wilson believes that digital payment rails create opportunities for improved risk management. Traditional clearinghouses typically calculate margin once a day, requiring market participants to post additional collateral by the following business day.
However, with real-time settlement, exchanges can recalculate margin continuously and require traders to post collateral immediately, reducing the need for large upfront margin requirements while maintaining the same level of protection. Wilson emphasized that the real innovation of perpetual futures lies in their ability to eliminate the need for investors to repeatedly roll expiring contracts, thereby reducing transaction costs and allowing positions to more closely track the front of the futures curve. He also urged regulators to focus on the economic substance of perpetual futures, rather than their legal labels, and to consider making them available across a broader range of markets, including commodities, securities, and cryptocurrency.