The concept of perpetual futures has become a cornerstone of the cryptocurrency financial landscape, yet according to DRW CEO Don Wilson, common perceptions about these instruments are misguided. In a series of posts, Wilson clarified that perpetual futures, or 'perps', are essentially futures contracts without an expiration date.
Characteristics often associated with crypto perpetuals, such as high leverage and auto-deleveraging, are not inherent to the contracts themselves but rather a result of how some crypto exchanges have chosen to implement them. Wilson emphasized that the features of perpetual futures are distinct from the contracts themselves, stating, 'Most of what people think they know about 'perps' ... has nothing to do with the contract itself.' His comments come at a time when there is growing interest in introducing perpetual futures into regulated U.S.
markets. Various exchanges and market participants are exploring the launch of perpetual futures beyond the crypto sphere, although questions regarding regulation and whether these products fit into existing frameworks remain.
Recently, Kalshi submitted a proposal to regulators to expand its offerings to include precious metals, following a significant surge in perps trading after its launch. Unlike traditional futures markets, crypto exchanges operate continuously, utilize digital collateral, and can calculate margin requirements in real-time, allowing for higher leverage and alternative liquidation mechanisms. Wilson argued that these design choices should not be confused with the fundamental nature of perpetual futures.
Instead, he suggested that digital payment systems offer opportunities to enhance risk management. Traditional clearinghouses typically calculate margins once a day, requiring market participants to post additional collateral by the next business day. This can lead to significant market movements during this window, necessitating larger initial margin buffers.
In contrast, real-time settlement enables exchanges to recalculate margins continuously, requiring immediate collateral posting from traders and reducing the need for substantial upfront margin requirements while maintaining protection levels. Wilson noted that whether exchanges translate these efficiencies into higher leverage is a business decision, not an inherent feature of perpetual futures. The true innovation of perpetual futures, according to Wilson, lies in their ability to eliminate the need for repeated contract rolls, thereby reducing transaction costs, market impact, and roll slippage, while allowing positions to more closely track the front of the futures curve.
Wilson urged regulators to focus on the economic substance of perpetual futures rather than their legal labels, stating, 'There's no reason to treat perpetuals as swaps simply because they don't expire. Economically, they're futures.' Ultimately, Wilson advocated for the broader availability of perpetual futures across various markets, including commodities, securities, and crypto, viewing them as a tool for price discovery and risk management rather than a crypto-specific innovation.