How a Chance Encounter on a Hong Kong Hike Revolutionized Crypto Trading

The concept of the perpetual swap, also known as a perpetual future, was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, a mathematician and co-founder of BitMEX, was discussing a problem with a friend, Bavik, a derivatives trader. BitMEX had been experimenting with various types of futures contracts, but customers were consistently complaining about their positions closing unexpectedly. Delo asked, "What if a future never expired?" Bavik replied that mathematically, it would be worth infinity. However, he suggested a solution: charge traders the bitcoin overnight rate, similar to how LIBOR is used in traditional finance. Delo built the perpetual swap, which became one of the most significant financial products of the 21st century. Initially, BitMEX was designed for institutional hedgers, but it ended up attracting retail traders who wanted to speculate with high leverage. The exchange offered 100x leverage by Halloween 2015, thanks to a real-time margining system built by Delo. The issue with futures contracts was the basis, the premium at which they trade above the spot price. In traditional finance, this is well understood, but in crypto, it was confusing. The perpetual swap launched in May 2016 with a daily funding rate that kept the contract price aligned with the spot price. The funding rate was initially derived from third-party lending markets but was later adjusted to a dynamic rate based on the swap's trading activity. This mechanism is now used by every major derivatives exchange in the world. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its center. The product's success can be attributed to its design, which consolidated liquidity into one instrument. Competitors noticed, and soon every major exchange in crypto offered its own perpetual swap. Delo believes that the product's success is a testament to its financial innovation, with an estimated $40-50 trillion in annual turnover. BitMEX chose not to patent the perpetual swap, focusing instead on building and improving the product. Now, traditional finance regulators are taking notice, with the CFTC reportedly making room for perpetual swaps under its framework. Delo sees this as the final validation of the product, which started as a question on a hillside above Hong Kong.