The concept of perpetual futures has become a cornerstone of cryptocurrency finance, but according to DRW CEO Don Wilson, common perceptions about them are often misguided. In a series of posts, Wilson clarified 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 emphasized that most misconceptions about 'perps' stem from the implementation rather than the contract itself. His comments 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 sphere. However, questions remain regarding their regulation and whether they fit within existing frameworks for futures or swaps. Wilson argued that the technological advancements allowing for real-time margin calculations and digital collateral should not be confused with the inherent nature of perpetual futures.
Instead, he suggested that these advancements provide opportunities for improved risk management. Traditional clearinghouses typically calculate margins once a day, requiring large initial margin buffers due to potential market movements before the next business day. In contrast, real-time settlement enables continuous margin recalculation, allowing for immediate collateral posting and reducing the need for large upfront margins while maintaining protection.
Wilson noted that the choice to offer higher leverage based on these efficiencies is a business decision, not a defining feature of perpetual futures. The true innovation of perpetual futures, according to Wilson, lies in their ability to eliminate the need for frequent contract rollovers, thereby reducing transaction costs, market impact, and roll slippage, while enabling positions to closely track the front of the futures curve.
Wilson urged regulators to focus on the economic substance of perpetual futures rather than their legal classification, arguing that they are economically equivalent to futures and should not be treated as swaps simply because they lack an expiration date. He concluded by advocating for the broader availability 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 product unique to cryptocurrency.