The concept of perpetual futures has become a cornerstone of crypto's financial landscape, yet DRW CEO Don Wilson asserts that common perceptions about them are misguided. In a series of posts, Wilson clarifies that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date.
Characteristics such as high leverage, auto-deleveraging, and continuous trading are not inherent to the contracts themselves but rather a result of how some crypto exchanges have chosen to implement them. Wilson's insights come at a time when there is growing interest in introducing perpetual futures into regulated US markets, with several exchanges exploring their launch beyond the crypto space.
Unlike traditional futures markets, crypto exchanges operate continuously, utilizing digital collateral and real-time margin requirement calculations, which has enabled them to offer products with higher leverage and alternative liquidation mechanisms. However, Wilson emphasizes that these design choices should not be conflated with the fundamental nature of perpetual futures.
He advocates for distinguishing between the contract itself and the technological and business model innovations that have been built around it. Wilson suggests that digital payment systems can enhance risk management by allowing for real-time settlement and continuous margin recalculation, thereby reducing the need for large initial margin buffers. He views the true innovation of perpetual futures as their ability to eliminate the need for frequent contract rollovers, which reduces transaction costs and allows positions to more accurately track market movements. Wilson urges regulators to focus on the economic substance of perpetual futures rather than their legal classification, arguing that they should be treated as futures contracts, not swaps, and made available across a broader range of markets for price discovery and risk management.