How a Hong Kong Hike Revolutionized Crypto Trading

The concept of the perpetual swap, also known as a perpetual future or 'perp,' was first conceived on a hiking trail in Hong Kong in 2015. Ben Delo, a mathematician and co-founder of BitMEX, was discussing a problem with his friend Bavik, a derivatives trader. BitMEX had been experimenting with various types of futures contracts, including quarterly, monthly, weekly, and 48-hour contracts, but none of them were meeting customer demands. Customers wanted a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo asked, 'What if a future never expired?' Bavik's response was that it would be mathematically worth infinity, but he also suggested charging traders the bitcoin overnight rate to solve the issue. However, Delo realized that this rate did not exist at the time, so he decided to create it. This led to the invention of one of the most significant financial products of the 21st century. To understand the impact of the perpetual swap, it's essential to consider what BitMEX was trying to achieve before it became the most liquid bitcoin market. When Delo and Arthur Hayes founded the exchange in 2014, they focused on institutional hedgers, but instead, they attracted sophisticated retail traders who wanted to speculate with high leverage. By October 2015, BitMEX was offering 100x leverage, thanks to a real-time margining system developed by Delo. The issue with futures contracts was the basis, which is the premium at which a futures contract trades above the spot price. This concept was not well understood in the crypto space at the time. Delo's conversation on the hiking trail gave him the framework to build a product that customers wanted - a leveraged product that never expired. The perpetual swap was launched in May 2016 with a daily funding rate that kept the contract price anchored to the spot price. Initially, the funding rate was derived from third-party lending markets, but it was later adjusted to a dynamic rate based on the swap's trading activity. This solution allowed market makers to anchor the swap price back to the spot price, creating a dynamic equilibrium. The funding rate mechanism developed by Delo is now used by every major derivatives exchange. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core. The product's success can be attributed to its design, which consolidated liquidity into one instrument. Competitors took notice, and eventually, every major exchange in crypto offered its own perpetual swap. Delo believes that the fact that every other exchange has copied the swap is a testament to its financial innovation. The perpetual swap is now attracting the attention of traditional finance regulators, with the CFTC reportedly making room for it under its framework. For Delo, this is the final validation of a product that started as a question on a hillside above Hong Kong.