RESOLVING THE LEDGER
This is one outlet's own report from CoinDesk — the article as it was filed. Other outlets are covering the same event; open the full story to compare every source side by side.
See the full story · 1 sources
It was sometime in 2015, on a hiking trail in Hong Kong, that the perpetual swap — also called a perpetual future or a “perp” for short — was born. Ben Delo, the mathematician and co-founder of BitMEX, was walking with a friend called Bavik, a derivatives trader, wrestling with a problem that had been nagging at him for months.
BitMEX had been trying everything. Quarterly futures, monthly futures, weekly futures, 48-hour futures, even a contract that lasted just 24 hours before resetting. Nothing was working. Customers kept complaining that their positions were closing without warning. They wanted something that looked like spot, traded like spot, but gave them the leverage that only a derivatives exchange could offer.
"What if a future never expired?" Delo asked.
Bavik's answer was immediate. "Mathematically, it would be worth infinity," Delo recalls him saying.
Technically, he was right. A futures contract's value is partly derived from the time remaining until expiry and the cost of carrying the position. Remove the expiry date and that carrying cost compounds indefinitely, making the theoretical value infinite. But then Bavik offered a solution: just charge traders the bitcoin overnight rate, the way you might charge LIBOR (London Interbank Offered Rate) in traditional finance.
There was one problem. "I said, what's that?" Delo recalls. "He said, ‘Hm, just charge them the overnight bitcoin interest rate’. I said, ‘I don't think that exists.’"
So Delo built it. And in doing so, he invented one of the most consequential financial products of the 21st century.
To understand why the perpetual swap mattered, you have to understand what BitMEX was trying to be before it became the most liquid bitcoin market in the world.
When Delo and Arthur Hayes founded the exchange in 2014, they were not thinking about retail traders chasing 100x leverage. They were thinking about institutional hedgers. Hayes had worked at Deutsche Bank, while Delo spent years building high-frequency trading systems at JP Morgan. Their thesis was that bitcoin miners and payment companies needed a way to hedge their exposure, and BitMEX would provide the professional infrastructure to do it.
"We built it basically to look like a Bloomberg terminal," Delo said. "We used Reuters instruction codes. Z14 meant expiring December 2014."
The institutions never came. What came instead were traders, sophisticated but retail, people who had financial experience but were playing with their own money. And what they wanted was not guaranteed settlement or low leverage. They wanted to speculate, and they wanted to do it with as much size and leverage as possible.
BitMEX listened. By Halloween 2015, the exchange was offering 100x leverage, made possible by a real-time margining system that Delo had built from scratch. "I built the order matching engine, the position keeping system, the margining system, the PnL system, the settlement system," he says. "Everything on that was me."
The issue with futures, even short-dated ones, is basis, the premium at which a futures contract trades above the spot price of the underlying asset. A futures contract trades at a premium to the underlying asset, and that premium reflects an implied interest rate. In traditional finance, this is well understood. In crypto, in 2015, it confused almost everyone.
"Our customers would be like, why is bitcoin so expensive on your exchange?" Delo recalled "And we would say, ‘Well, if it is expensive, why don't you short it?’ And that would blow some of their minds. You could short something rather than just long it."
BitMEX kept shortening the expiry of its listed futures contracts. Weekly futures. Then 48-hour. Then a contract that relisted every single day.
"Every 24 hours, it would expire or settle. And people would say, ‘Why did you liquidate me?’ And we'd say, ‘We didn't liquidate you. Your position closed at the index price. You got exactly the spot price,’” Delo said. “They're like, ‘We don't understand.’"
The customers knew what they wanted, even if they could not articulate it. They wanted a leveraged product that never went away. Delo's hiking trail conversation gave him the framework to build one.
The perpetual swap launched in May 2016 with little ceremony. The core mechanic was straightforward: a futures contract with no expiry date, anchored to the spot price through a daily funding rate. Longs paid shorts, or vice versa, depending on whether the swap was trading above or below spot. BitMEX took no cut. The rate was purely a balancing mechanism.
The early funding rate was derived from third-party lending markets, primarily Bitfinex, where traders could borrow dollars or lend out Bitcoin. Take the dollar borrow rate, subtract the Bitcoin borrow rate, and you had something approximating the cost of holding a long position.
It worked, until it did not. As Bitcoin began its rise through 2016 and into 2017, demand for long exposure on BitMEX overwhelmed the funding mechanism. The swap started trading at a persistent premium to spot, causing the contract price to drift away from the actual price of bitcoin and undermining the mechanism designed to keep them aligned. The interest rate being imported from Bitfinex was simply not high enough to reflect what was happening on BitMEX itself.
"We had to dynamically adjust how we calculated that funding rate," Delo said.
The original funding rate had been imported from external lending markets, a fixed reference point that could not respond to conditions on BitMEX itself. The new approach replaced that with a dynamic one, looking inward at how the swap was actually trading rather than outward at what Bitfinex was charging to borrow dollars.
The solution was elegant. Rather than looking outward to other markets, BitMEX would look inward. The exchange began measuring how far the swap was trading above or below spot over an eight-hour window, treating that gap as an implied basis, and back-calc...
AIPROPX is an independent multi-source news index — we track, compare, and connect coverage from across the web into one place you won't find anywhere else.