The Genesis of a Revolutionary Trading Concept: How a Hong Kong Hike Transformed Crypto Trading

The concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived on a hiking trail in Hong Kong in 2015. Ben Delo, a mathematician and co-founder of BitMEX, was discussing a persistent problem with a friend, Bavik, a derivatives trader. Despite experimenting with various futures contracts, including quarterly, monthly, weekly, and 48-hour contracts, BitMEX struggled to find a solution that met customer demands. Customers were frustrated with positions closing unexpectedly, and they desired a product that mimicked spot trading but offered the leverage of a derivatives exchange. Delo posed a question: 'What if a future never expired?' Bavik's response was immediate: 'Mathematically, it would be worth infinity.' Although technically correct, this response prompted Delo to devise a solution. He proposed charging traders the bitcoin overnight rate, similar to the LIBOR in traditional finance. However, Delo soon realized that this rate did not exist, prompting him to create it. This innovation led to the development of one of the most significant financial products of the 21st century. To understand the perpetual swap's significance, it is essential to consider BitMEX's origins. Founded in 2014 by Delo and Arthur Hayes, the exchange aimed to provide institutional hedgers with a platform to manage their bitcoin exposure. However, instead of attracting institutions, the exchange drew sophisticated retail traders seeking speculation and high leverage. BitMEX adapted to this demand, introducing 100x leverage by Halloween 2015, made possible by Delo's real-time margining system. The issue with futures contracts, even those with short expiration dates, was the basis – the premium at which a futures contract trades above the spot price of the underlying asset. This concept was poorly understood in the crypto space at the time. Customers would express confusion about the higher prices on BitMEX, and the exchange would explain that the premium was a result of the implied interest rate. The solution to this problem was the perpetual swap, which launched in May 2016. The core mechanism 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. Initially, the funding rate was derived from third-party lending markets, but this approach ultimately failed to keep the contract price aligned with the actual bitcoin price. Delo introduced a dynamic funding rate, which looked inward at the swap's trading activity rather than outward at external lending markets. This innovation allowed the exchange to measure 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. This rate was then charged at the end of the next eight-hour window, creating a dynamic equilibrium. The perpetual swap's success was rapid, with BitMEX becoming the most liquid bitcoin market by 2017. The exchange processed $3-4 billion daily, with the perpetual swap at its core. Price discovery for bitcoin was happening on the BitMEX order book, rather than traditional exchanges like Coinbase or Bitstamp. The concentration of liquidity was a direct result of the swap's design, which collapsed multiple contracts into a single instrument. Competitors took notice, with some literally copying the product without fully understanding its mechanics. Today, every major exchange in crypto offers a perpetual swap, each built on the funding rate architecture Delo developed. The fact that competitors have copied the swap is a testament to its financial innovation, with Delo estimating that it now facilitates $40-50 trillion in turnover annually. BitMEX chose not to patent the perpetual swap, opting instead to focus on building and letting the market validate the product. A decade later, the product is attracting the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. Delo believes that once traditional finance recognizes the benefits of this financial product, its impact will be impressive.