What is a Perpetual Swap?

Updated: Oct 27

Perpetual futures were first proposed by economist Robert Shiller in 1992, to enable derivatives markets for illiquid assets. However, perpetual futures markets have only developed for cryptocurrencies, following their introduction in 2016 by BitMEX.

In 1992, Robert Shiller proposed perpetual futures, alongside a method for generating asset-price indices using hedonic regression, accounting for unmeasured qualities by adding dummy variables that represent elements of the index, indicating the unique quality of each element, a form of repeated measures design. This was intended to permit the creation of derivatives markets for illiquid, infrequently-priced assets, such as single-family homes, as well as untraded indices and flows of income, such as labor costs or the consumer price index.

Perpetual futures for the value of a cash flow, dividend or index, as envisioned by Shiller, require the payment of a daily settlement, intended to mirror the value of the flow, from one side of the contract to the other.

The first significant uses of perpetual futures came in the form of cryptocurrency contracts, first offered by BitMEX in May 2016, that became popular amongst traders by permitting highly-leveraged trading at different time-horizons in a liquid market without inordinate counterparty risk in the absence of regulated intermediaries. As a result perpetual swap volume has exploded bringing broader crypto futures volume up as well - in 2021 futures volumes peaked in May at $2.56T in monthly volume and held strong through August at $1.73T in monthly volume, with a majority of that volume consisting of perpetual futures.

Perpetual futures are now popular products for cryptocurrency, with Binance, Huobi, OKex, FTX and other exchanges offering competitive perpetual futures products. A number of conventions have developed in the cryptocurrency perpetual market, due to greater volatility and the lack of regulatory requirements mandating a particular market structure. Unlike traditional futures, cryptocurrency perpetuals typically use the cryptocurrency as their base currency, making them inverse futures. Settlement between different sides of the trade, known as funding, typically occurs every eight hours. In addition, given the lack of a cryptocurrency repo market and, consequently, an overnight rate, the base interest on cryptocurrency perpetuals is usually a fixed percentage set by the exchange.

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