The concept of perpetual futures has become a cornerstone of the cryptocurrency market, but according to Don Wilson, CEO of DRW, there are many misconceptions surrounding this product. In a series of posts, Wilson clarified that perpetual futures, or 'perps,' are essentially futures contracts without an expiration date. The high leverage, auto-deleveraging, and continuous trading often associated with crypto perpetuals are a result of how some exchanges have chosen to implement these products, rather than inherent characteristics of the contracts themselves. Wilson emphasized that the features commonly linked to perpetual futures are not inherent to the contract, but rather a byproduct of the implementation choices made by crypto exchanges.
As interest in introducing perpetual futures to regulated US markets grows, Wilson's comments come at a crucial time. Several exchanges are exploring the launch of perpetual futures beyond the crypto space, but there are still questions about how these products should be regulated and whether they fit within existing frameworks. Unlike traditional futures markets, crypto exchanges operate continuously, utilizing digital collateral and real-time margin calculations.
This has enabled them to offer products with higher leverage and alternative liquidation mechanisms. Wilson, however, stressed that these design choices should not be conflated with perpetual futures themselves. Instead, he argued that digital payment systems can enhance risk management.
Traditional clearinghouses typically calculate margin on a daily basis, allowing market participants to post additional collateral the following business day. In contrast, real-time settlement enables exchanges to recalculate margin continuously, requiring traders to post collateral immediately and reducing the need for large upfront margin requirements. Wilson noted that the true innovation of perpetual futures lies in their ability to eliminate the need for repeated contract roll-overs, thereby reducing transaction costs and allowing positions to more accurately track the futures curve. He urged regulators to focus on the economic substance of perpetual futures rather than their legal classification, stating that they should be treated as futures, not swaps, due to their economic characteristics.
Ultimately, Wilson advocated for the broader availability of perpetual futures across various markets, including commodities, securities, and cryptocurrencies, viewing them as a valuable tool for price discovery and risk management.