The idea for the perpetual swap was conceived in 2015 on a hiking trail in Hong Kong, where Delo was discussing the challenges of futures contracts with a friend and derivatives trader, Bavik. The problem they were trying to solve was how to create a futures contract that never expired, thereby giving traders the leverage they desired without the hassle of frequent expirations. Bavik's suggestion to charge traders the bitcoin overnight rate sparked an idea in Delo, who then set out to build the necessary infrastructure to make it a reality.
The perpetual swap, also known as a perpetual future or 'perp', was launched in May 2016 and quickly gained popularity among traders. The core mechanic of the perpetual swap was straightforward: 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, with the rate serving as a balancing mechanism. Initially, the funding rate was derived from third-party lending markets, but this approach proved inadequate as demand for long exposure on BitMEX overwhelmed the funding mechanism.
Delo and his team had to dynamically adjust the funding rate, replacing the fixed reference point with a dynamic one that looked inward at how the swap was trading. The solution involved measuring the gap between the swap and spot prices over an eight-hour window, treating it as an implied basis, and back-calculating the annualized rate from it. This approach created a dynamic equilibrium, where market makers could anticipate and respond to changes in the funding rate. The perpetual swap's success was rapid, with BitMEX becoming the most liquid bitcoin market in the world by 2017.
The exchange was processing $3-4 billion a day, with the perpetual swap at the center of it all. The concentration of liquidity was a direct result of the swap's design, which collapsed multiple contracts into one instrument.
Competitors took notice, with many copying the concept and incorporating it into their own offerings. Today, the perpetual swap is considered one of the most successful financial products in history, with an estimated $40-50 trillion in annual turnover. Delo's decision not to patent the perpetual swap allowed it to spread quickly, and now, a decade on, traditional finance regulators are taking notice.
The CFTC is reportedly making room for perpetual swaps under its framework, and speculation suggests that the CME could eventually list them on equities. For Delo, this prospect is the final validation of a financial innovation that started as a question on a hillside above Hong Kong.