The concept of the perpetual swap, also known as a perpetual future, was born in 2015 on a hiking trail in Hong Kong. Ben Delo, co-founder of BitMEX, was discussing a problem with his friend Bavik, a derivatives trader.
BitMEX had been experimenting with various types of futures contracts, but none were working as intended. Customers were complaining that their positions were being closed without warning, and they wanted a product that combined the benefits of spot trading with the leverage of derivatives. Delo asked, "What if a future never expired?" Bavik's response was that it would be worth infinity from a mathematical perspective, but he suggested charging traders the bitcoin overnight rate to make it viable. Delo decided to build it, and in doing so, he created one of the most influential financial products of the 21st century.
The early days of BitMEX were focused on building a professional infrastructure for institutional hedgers, but the company eventually shifted its focus to retail traders. By offering 100x leverage and a real-time margining system, BitMEX became a hub for sophisticated traders.
However, the company still struggled with the issue of basis, which is the premium at which a futures contract trades above the spot price of the underlying asset. To address this, Delo invented the funding rate mechanism, which is now used by every major derivatives exchange in the world. The perpetual swap was launched in May 2016 and quickly became the most liquid bitcoin market on the planet. The product's success can be attributed to its ability to consolidate liquidity into one instrument, making it more attractive to market makers and traders.
Today, the perpetual swap is considered one of the most successful financial products in history, with an estimated $40-50 trillion in annual turnover. Despite its success, BitMEX chose not to patent the product, instead focusing on building and improving it. As traditional finance regulators begin to take notice of the perpetual swap, it may soon become a staple of the financial industry.