The Genesis of Perpetual Swaps: How a Hong Kong Hike Revolutionized Crypto Trading

The concept of perpetual swaps was born in 2015 on a hiking trail in Hong Kong, where Ben Delo, the co-founder of BitMEX, was discussing a problem with his friend Bavik, a derivatives trader. BitMEX had been experimenting with various futures contracts, but customers kept complaining about their positions closing unexpectedly. Delo asked, "What if a future never expired?" Bavik's response was that it would be mathematically worth infinity, but he suggested charging traders the bitcoin overnight rate to solve the issue. Delo built the product, which became one of the most influential financial innovations of the 21st century. Initially, BitMEX was designed for institutional hedgers, but it ended up attracting retail traders who wanted to speculate with high leverage. The exchange offered 100x leverage by Halloween 2015, thanks to Delo's real-time margining system. However, the issue of basis, where futures contracts trade at a premium to the underlying asset, confused many customers. Delo's solution was to create a perpetual swap with a daily funding rate, which kept the contract price aligned with the spot price. The funding rate was initially derived from external lending markets but was later adjusted dynamically based on the swap's trading activity. This mechanism allowed market makers to anchor the contract price to the spot price, creating a dynamic equilibrium. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion in daily transactions, with the perpetual swap at its core. The product's success led to its adoption by other exchanges, and it is now considered one of the most successful financial products in history, with an estimated $40-50 trillion in annual turnover. Despite its success, BitMEX chose not to patent the perpetual swap, and the product is now attracting the attention of traditional finance regulators, with potential implications for the broader financial industry.