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Another interesting #bitcoin 
futures history story is just how the BitMEX perpetual contract came to be.
It was not something that happened overnight, in fact it was months of trial and error from the BitMEX team until they realised how easy it was 1/n ....
futures history story is just how the BitMEX perpetual contract came to be.It was not something that happened overnight, in fact it was months of trial and error from the BitMEX team until they realised how easy it was 1/n ....
...it started when BitMEX was trying to jam the legacy market structure into crypto. They started by running Weekly futures (like OKCoin/BitVC) and doing calendar spread contracts to roll into later contract on expiry...
...then they decided to run 24-hour contracts on BTC:USD, and then running 48-hour contracts on BTC:USD, side by side with the 24-hour contracts, together with a calendar spread contract so people could roll positions between the two...
...this is when volume really started to pick up on BitMEX. they had dropped the "dynamic profit equalisation" aka socialised losses and instead gone for a fatter insurance fund, aggressive liquidation system, 100x leverage (rekting OKCoin's puny 20x offering) and the new...
.... "auto-deleveraging" risk management which was basically instant clawbacks whenever a bankrupt party couldn't be filled in the book using the insurance fund. Crypto Facilities had something similar, called "termination" ...
... so the guys at BitMEX racked their head and were like "okay, instead of this 24-hour, 48-hour contract with calendar spread structure cant we just do a futures contract that doesn't expire?" this was definitely doable, but required an interest rate component....
...the problem though of course is that in bitcoin you don't have a reliable benchmark for interest rates on bitcoin. dollar is easy enough, but bitcoin really had a limited lending market, for the most part just happening on polo and bitfinex spot-margin markets, so...
...their first thought, logically enough, was to do like legacy FX CFDs and derive the funding rate externally in such a way that balanced supply and demand out and the face price of contracts matched the spot price. this meant using Bitfinex total return swap rates...
...the problem with this was that Bitfinex rates were pretty volatile. it was often that offered funding on swaps there was running dry, so the BTC and USD rates would spike. this led to some chaos in the early iterations of BitMEX's perpetual contract. so they took a chance...
...and decided instead to see what would happen if the funding rate was _endogeneously_ determined just by the trading on the perpetual orderbook vs. a spot index. it was a gamble: was the market efficient enough to price a fair value and funding rate? the answer came quickly...
...and the perpetual contract was able to reflect market rates, the implied "covered interest parity" of BTC & USD lending rates, very well. it consistently set a positive rate reflecting the cost of going margin long on BTC:USD accurately. Thus was born Perpetual Swap. The End.
