A contract that never expires
The perpetual swap, which Delo developed and BitMEX launched in May 2015, 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.
