The concept of perpetual futures has become a cornerstone of the cryptocurrency market, but according to Don Wilson, CEO of DRW, many misconceptions surround this product. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date. The features commonly 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 characteristics often linked to perpetual futures are 'not the contract itself,' but rather a byproduct of the technology and design choices made by exchanges. As interest in introducing perpetual futures to regulated US markets grows, Wilson's comments come at a pivotal moment.
Several exchanges are exploring the launch of perpetual futures beyond the crypto space, but regulatory questions persist. Unlike traditional futures markets, crypto exchanges operate continuously, utilizing digital collateral and real-time margin calculations. These technological advancements have enabled exchanges to offer products with higher leverage and alternative liquidation mechanisms.
However, Wilson cautioned against confusing these design choices with the fundamental nature of perpetual futures. He expressed his disapproval of auto-deleveraging, stating that it is not a necessary component of perpetual futures.
Instead, Wilson highlighted the potential of digital payment systems to enhance 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, real-time settlement allows exchanges to recalculate margin continuously, reducing the need for large initial margin buffers while maintaining the same level of protection. Wilson argued that the true innovation of perpetual futures lies in their ability to eliminate the need for repeated contract rollovers, thereby reducing transaction costs and allowing positions to more closely track the front of the futures curve.
He urged regulators to focus on the economic substance of perpetual futures rather than their legal classification, emphasizing that 'economically, they're futures.' Ultimately, Wilson advocated for the broader adoption of perpetual futures across various markets, including commodities, securities, and crypto, viewing them as a valuable tool for price discovery and risk management rather than a crypto-specific innovation.