RESOLVING THE LEDGER
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Perpetual swaps, also called perpetual futures or “perps” for short, are the dominant trading instrument in the crypto market, processing an estimated $40 to 50 trillion a year in volume. They dwarf spot trading, and they are the product that professional traders, hedge funds and retail speculators reach for when they want leveraged exposure to the price of bitcoin or tther without owning the underlying asset. Despite their ubiquity, the mechanics that make them work are not widely understood.
To understand perps, it helps to understand what came before them. In traditional finance, leveraged exposure to an asset typically comes through a futures contract, an agreement to buy or sell something at a set price on a specific date. When that date arrives, the contract expires and settles. Traders who want to maintain their position must roll it into the next contract.
In crypto’s early days, this practice created persistent problems. Futures traded at a premium to the spot price of bitcoin, a concept known as basis, which confused retail traders who wanted straightforward directional exposure. And every time a contract expired, positions closed regardless of whether traders wanted them to. BitMEX, the derivatives exchange founded by Arthur Hayes and Ben Delo in 2014, spent the better part of a year shortening contract durations trying to solve this, moving from quarterly to monthly to weekly to 48-hour to 24-hour expiries, but none of that was enough.
The perpetual swap, which Delo developed and BitMEX launched in 2016, resolved the problem by eliminating the expiry date entirely, creating a derivative contract that tracks the price of an asset indefinitely. There is no settlement date, no rolling and no expiry. Traders can hold a position for hours or years. This created an immediate structural challenge: without an expiry date to act as an anchor, nothing would naturally force the contract price back toward the spot price of the underlying asset. BitMEX solved this through a mechanism that has since become the industry standard.
Every eight hours, a payment is exchanged between traders on opposite sides of the market. If the perpetual swap is trading above the spot price, indicating excess demand for long positions, traders who are long pay traders who are short. If the perpetual swap is trading below spot, the payment runs the other way. The exchange takes no cut. The rate of this payment, known as the funding rate, is calculated based on how far the perpetual swap price has deviated from spot over the preceding eight-hour window. The further the deviation, the higher the rate. This creates a self-correcting equilibrium. When longs are being charged a substantial funding rate, it becomes expensive to hold the position, which reduces demand and pulls the price back toward spot. Market makers accelerate this process by shorting the perpetual swap and buying spot whenever a meaningful premium opens up, capturing the difference as profit. The funding rate mechanism is now used, in essentially the same form, by every major derivatives exchange in the world.
The other defining feature of perpetual swaps is leverage. Most exchanges allow traders to control positions significantly larger than their deposited capital, with limits varying by platform and jurisdiction. At BitMEX in its prime, leverage of up to 100 times was available, meaning a 1% move in Bitcoin's price would produce a 100% gain or loss on a fully leveraged position. To manage the risk this creates for the exchange, perpetual swap platforms use automated liquidation systems. If a trader's losses approach the value of their deposited margin, the system closes the position before it can go negative, protecting the exchange from absorbing the deficit. The speed and reliability of that liquidation engine became a key competitive differentiator in the early years of the market, and remains central to how exchanges compete today.
Perpetual swaps are now the primary venue for price discovery in crypto. When bitcoin moves sharply, the move typically originates in perp markets before spreading to spot. The structure Delo built in 2016 has proven durable enough that regulators in the U.S. are now exploring its application to traditional assets, with the CME potentially listing perpetual swaps on equities. What began as a workaround for the limitations of crypto futures has become one of the most traded financial products in the world.
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