In 2015, during a hike in Hong Kong, mathematician and BitMEX co-founder Ben Delo had a conversation with a friend, Bavik, a derivatives trader, that would change the course of cryptocurrency trading. They were grappling with the issue of futures contracts expiring, causing customers' positions to close without warning. Delo asked what if a future never expired, and Bavik replied that mathematically, it would be worth infinity.
However, Bavik proposed a solution: charge traders the bitcoin overnight rate. This conversation laid the foundation for the creation of the perpetual swap, a financial product that would go on to shape the cryptocurrency market.
The perpetual swap, launched in 2016, was 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.
Initially, the funding rate was derived from third-party lending markets but was later adjusted to be dynamic, looking inward at how the swap was trading rather than outward at external markets. This mechanism allowed market makers to anchor the swap back to the spot price, creating a dynamic equilibrium.
The perpetual swap became a huge success, and by 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion a day. The product's design concentrated liquidity, making it a more liquid market with tighter spreads. Competitors took notice, and eventually, every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture that Delo had created.
Today, the perpetual swap is considered one of the most successful financial products in history, with an estimated $40-50 trillion in turnover per year. Delo believes that traditional finance is starting to take notice of the benefits of this product, and it may eventually be adopted by traditional finance regulators and exchanges.