How a Chance Encounter on a Hong Kong Hike Revolutionized Crypto Trading

In 2015, a casual conversation on a Hong Kong hiking trail between Ben Delo, co-founder of BitMEX, and his friend Bavik, a derivatives trader, laid the groundwork for a groundbreaking financial product. Delo was struggling to find a solution to the issues plaguing BitMEX's futures contracts, which were not meeting customer demands. The perpetual swap, or 'perp,' was conceived as a result of this conversation. The concept was simple: a futures contract with no expiration date, which would allow for leverage without the constraints of traditional futures contracts. The perp's value would be tied to the spot price through a daily funding rate, with longs paying shorts or vice versa, depending on whether the swap was trading above or below spot. This innovative product would go on to change the face of crypto trading forever. The journey to creating the perpetual swap was not without its challenges. Initially, the funding rate was derived from external lending markets, but this approach proved inadequate as demand for long exposure on BitMEX skyrocketed. Delo and his team had to dynamically adjust the funding rate to reflect the actual trading conditions on the platform. The solution involved measuring the gap between the swap and spot prices over an eight-hour window and using this implied basis to calculate the funding rate. This dynamic equilibrium allowed market makers to anchor the swap back to the spot price, creating a stable and liquid market. By 2017, BitMEX had become the most liquid bitcoin market, with the perpetual swap at its core. The concentration of liquidity was a direct result of the swap's design, which consolidated market maker capital into a single instrument. The success of the perpetual swap did not go unnoticed, and soon competitors began to take notice. Other exchanges started to offer their own versions of the product, each built on the funding rate architecture that Delo had developed. Today, the perpetual swap is one of the most widely used financial products in the crypto space, with an estimated turnover of $40-50 trillion per year. The fact that every major exchange has adopted the perpetual swap is a testament to its innovative design and the vision of its creators. As traditional finance regulators begin to take notice of the perpetual swap, it is likely that this product will continue to play a significant role in shaping the future of financial markets.