CoinDesk revealed that the initial idea for BitMEX perpetual contracts came about during a hike in Hong Kong in 2015. BitMEX co-founder Ben Delo was looking for a Bitcoin trading product that was closer to spot trading while also offering leverage, and eventually proposed the idea of a "never-expiring" contract.
The early problems stemmed from the expiration mechanism.
Prior to this, BitMEX had experimented with various contract terms, including quarterly, monthly, weekly, 48-hour, and 24-hour contracts, but users consistently complained that their positions would be involuntarily closed during settlement. Many traders wanted a leveraged product that wouldn't expire and could be held indefinitely, not futures contracts that were constantly being rolled over.
Delo recalled that traditional futures prices include both the expiration date and the cost of holding the position. If the expiration date were removed, theoretical pricing would lose its constraint. His colleagues suggested introducing a Bitcoin overnight rate, similar to how traditional financial markets charge holding costs based on interest rates, allowing both long and short positions to periodically pay fees.
It was launched in 2016 and gradually finalized.
The problem was that there was no mature, unified overnight Bitcoin interest rate in the market at the time. Delo subsequently built this mechanism himself and made it the core design of perpetual contracts. BitMEX officially launched the product in May 2016, which essentially uses funding rates to make the contract price fluctuate around the spot price.
Initially, BitMEX referenced external lending markets, particularly the interest rate spread between USD and Bitcoin on Bitfinex, to estimate the cost of holding long positions. However, with the rise of Bitcoin from 2016 to 2017, the demand for long positions on the platform increased rapidly, and external interest rates could no longer reflect the true internal supply and demand. As a result, perpetual contract prices began to be higher than spot prices for an extended period.
Funding rates will now be calculated based on 8-hour spreads.
To address the deviation issue, BitMEX later switched to a dynamic calculation method, no longer relying primarily on external lending rates. Instead, it directly observes the price difference between perpetual contracts and the spot index within an 8-hour window, then deduces the corresponding fee rate, and settles in the next 8-hour cycle.
This practice allows market makers to know in advance how the fees are calculated and when they are paid, thus enabling them to engage in arbitrage more actively. If the perpetual contract price is higher than the spot price, the short seller can earn funding fees, and arbitrage funds will enter the market to short the contract and buy the spot, pushing the price back towards the spot price.
Perpetual contracts concentrate liquidity
By 2017, BitMEX had become one of the most liquid Bitcoin markets, with daily trading volume reaching $3 billion to $4 billion. Unlike previous contracts that listed multiple maturities simultaneously, perpetual contracts consolidated liquidity, which was previously scattered across quarterly, monthly, weekly, and ultra-short-term contracts, into a single product, thus increasing trading depth.
Delo told CoinDesk that almost all major crypto exchanges later launched their own perpetual contract products, all based on a similar funding rate structure. The article considers this one of the most representative product innovations in the crypto derivatives market.
