The Systemic-Risk Debate Over Perpetual Futures Is Aimed at the Wrong Target
Critics warn that perpetual futures import systemic risk, but the risk comes from venue design, not the contract itself. The debate is aimed at the wrong target, and the real question is how a given venue is built.
Intelligence analysis by Llama
The systemic-risk debate over perpetual futures is misguided, as the risk comes from venue design, not the contract itself. The real question is how a venue handles a default under stress, and regulated clearing has established a standard for decades.
Imagine you have a special kind of investment that never expires and can be traded continuously. This is called a perpetual future. Some people worry that these investments can cause big problems in the market, but the real issue is how the market is designed to handle these investments. If the market is designed well, it can contain the risk and prevent big problems. But if it's not designed well, it can transmit the risk and cause big problems.
Analysis
The Misguided Debate Over Perpetual Futures
The systemic-risk debate over perpetual futures is aimed at the wrong target. Critics warn that retail-driven, high-leverage instruments will import systemic risk, but the risk comes from venue design, not the contract itself. The concern isn't baseless, as crypto's sharpest deleveraging episodes have many causes, including macro shocks, stablecoin de-pegs, exchange outages, oracle failures, over-leverage, and thin liquidity. However, what turns a sell-off into a systemic event is the risk transmission mechanism, and in crypto, that is usually the liquidation cascade.
The Real Question: How a Venue Handles a Default
The real question is not whether perpetuals belong in regulated markets, but how a given venue is built. Regulatory requirements are necessary to secure the baseline, including segregated funds, a registered clearing entity, and a supervisor's oversight. However, how a venue handles a default under stress is a separate choice, and it varies even inside the regulated perimeter.
The Difference Between Containing a Failure and Transmitting It
The difference between a venue that contains a failure and one that transmits it is the key to understanding systemic risk. A default absorbed at its source, not force-fed into a falling market, is the difference between a venue that contains a failure and one that transmits it. This is the standard that regulated clearing has established for decades, and it is the standard that Bullish is building toward.
The Overlooked Prize: A Deep, Durable Pool of Liquidity
The debate over perpetual futures has overlooked the prize of a deep, durable pool of liquidity in the instruments a hedging desk wants. Retail gravitates to perpetuals for what they are: no expiry, no roll, continuously tradable. The design that draws that flow concentrates liquidity in perpetuals, making them the deepest, most continuously tradable delta-one instruments available.
Key points
- The systemic-risk debate over perpetual futures is aimed at the wrong target.
- The risk comes from venue design, not the contract itself.
- Regulated clearing has established a standard for decades.
- The real question is how a given venue is built.
- A deep, durable pool of liquidity in perpetuals is the overlooked prize.
If the market is designed well, perpetual futures can become a safe and reliable way for institutions to manage risk. This can lead to a deeper and more liquid market, making it easier for institutions to hedge their positions and reducing the risk of big problems.
If the market is not designed well, perpetual futures can cause big problems in the market. This can lead to a cascade of liquidations, where one failed investment causes others to fail, and the market becomes unstable.
