The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, with critics warning that these high-leverage instruments will destabilize the market. However, this critique is misplaced, as the risk is inherent to the venue's design, not the contract. The venue's choices, such as leverage caps, margin rules, and default management, determine the level of risk.
The concern is not unfounded, as past deleveraging episodes in the crypto market have been caused by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages. The liquidation cascade, which is often triggered by forced liquidations, can transmit risk to other venues, causing a systemic event. Nevertheless, this is not a feature of perpetual futures, but rather a result of poor venue design.
The real question is not whether perpetuals belong in regulated markets, but how a given venue is constructed. Regulatory requirements, such as segregated funds, registered clearing entities, and supervisory oversight, are essential to establishing a baseline. The way a venue handles defaults under stress is a separate choice, and it varies even within regulated markets. Another objection to perpetuals is that institutions may not want them, as they are seen as speculative rather than a replacement for regulated futures.
However, this is not entirely accurate, as institutions use perpetuals to hedge delta, not as a substitute for dated futures. The liquidity of perpetuals is a major draw for institutions, which need to manage risk in real-time.
The design of perpetuals, which includes no expiry and continuous tradability, concentrates liquidity and draws in retail flow. This liquidity edge is structural and provides a deep, durable pool of liquidity for hedging desks.
The debate surrounding perpetuals is not about their inherent danger, but about how venues handle defaults when the market is under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. By containing defaults at their source, rather than transmitting them to the market, venues can break the chain that turns a blown-out account into a market-wide cascade. This is the difference between a venue that contains a failure and one that transmits it, and it is the transmission that critics fear.
Meeting this standard is essential to making perpetuals a safe and useful tool for institutions.