The concept of perpetual futures has become a staple in the crypto industry, but according to DRW CEO Don Wilson, there are many misconceptions surrounding this product. In a series of posts, Wilson explained that perpetual futures, or 'perps', are essentially futures contracts without 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 a fundamental aspect 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 launch of perpetual futures beyond crypto, but there are still questions about how these products should be regulated.
Wilson argued that the design choices made by crypto exchanges, such as offering high leverage and alternative liquidation mechanisms, should not be confused with the inherent nature of perpetual futures. Instead, he believes that digital payment rails can improve risk management by allowing for real-time settlement and continuous margin recalculation. This can reduce the need for large upfront margin requirements while maintaining the same level of protection.
Wilson also emphasized that the true innovation of perpetual futures lies in their ability to eliminate the need for investors to repeatedly roll expiring contracts, thereby reducing transaction costs and market impact. He 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 crypto.