The concept of perpetual futures has become a cornerstone of the crypto industry, but according to Don Wilson, CEO of DRW, there are many misconceptions surrounding this product. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date.
The characteristics commonly associated with crypto perpetuals, such as high leverage and auto-deleveraging, are a result of how certain crypto exchanges have chosen to implement these products, rather than inherent features of the contracts themselves. Wilson's comments come at a time when there is growing interest in introducing perpetual futures into regulated US markets. Several exchanges and market participants are exploring the launch of perpetual futures beyond the crypto space, but there are still questions about how these products should be regulated and whether they fit within existing frameworks.
Unlike traditional futures markets, crypto exchanges operate continuously and utilize digital collateral, allowing for real-time calculation of margin requirements. Wilson emphasized that these design choices should not be confused with the concept of perpetual futures itself. Instead, he argued that digital payment systems create opportunities for improved risk management. Traditional clearinghouses typically calculate margin on a daily basis, requiring market participants to post additional collateral by the next business day.
In contrast, exchanges with real-time settlement can recalculate margin continuously, enabling traders to post collateral immediately and reducing the need for large upfront margin requirements. Wilson believes that the true innovation of perpetual futures lies in their ability to eliminate the need for investors to repeatedly roll over expiring contracts, thereby reducing transaction costs and market impact. He urged regulators to focus on the economic substance of perpetual futures rather than their legal labels, stating that they should be treated as futures, not swaps, due to their economic characteristics. Ultimately, Wilson advocates for the widespread adoption of perpetual futures across various markets, including commodities, securities, and crypto, as a tool for price discovery and risk management.