The introduction of perpetual futures into regulated markets has sparked a heated debate, with critics warning of the potential for systemic risk due to high-leverage, retail-driven instruments. However, this criticism is misplaced, as the risk is inherent to the venue on which the perpetuals are traded, not the contract itself. The true risk factors include leverage caps, margin requirements, funding design, and default management, which are all choices made by the venue. The concern is not unfounded, as past deleveraging episodes in the crypto market have been caused by a combination of macro shocks, stablecoin de-pegs, exchange outages, oracle failures, over-leverage, and thin liquidity.
The risk transmission mechanism, often in the form of a liquidation cascade, can turn a sell-off into a systemic event. Nevertheless, this is not a feature of perpetuals, but rather a result of venue design. The real question is how a given venue is built and whether it can handle defaults under stress. Regulatory requirements are essential to establishing a baseline, including segregated funds, a registered clearing entity, and supervisory oversight.
The way a venue handles defaults under stress is a separate choice, and it varies even within the regulated perimeter. A more pertinent objection 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 is based on the mechanics of perpetuals, which do fall short as a substitute for dated futures due to their variable funding and basis risk. Institutions are not looking to replace dated futures with perpetuals, but rather use them to hedge delta, taking advantage of the liquidity they provide. The liquidity edge of perpetuals is structural, drawing in retail flow and concentrating liquidity in these instruments.
This is the overlooked prize in bringing perpetuals onshore, providing a deep and durable pool of liquidity for hedging desks. The two halves of the debate are intertwined, as 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 question is not whether perpetuals are dangerous, but how a venue handles defaults under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building toward. By containing defaults at their source, rather than force-feeding them into a falling market, the chain that turns one blown-out account into a market-wide cascade can be broken.
This is the difference between a venue that contains a failure and one that transmits it, and the transmission is the systemic risk that critics fear. Meeting this standard is what makes perpetuals infrastructure that institutions can use safely.