The History of Perpetual Futures and On-Chain Applications
Research Competition
From Academic Theory to HyperLiquid
In recent years, a new form of trading markets has emerged, expanding and evolving from the historic need for those in irregular commodity industries to speculate on the future value of their assets. This mutated marketplace gained popularity in a part of the financial world often neglected by those managing the deeply complex system our modern global economy has become so reliant on, yet as the years continue to pass, this digitalized oddity continues to attract more and more capital, cementing a place in the monetary ecosystem. This paper aims to create a narrativized history of how perpetual future markets came to be, and why they have experienced such exponential growth in recent years. Starting with academic origins, moving through the push for innovative trading methods, and concluding with the current state of the ever-evolving markets, the reader should finish this paper with an understanding of how these hyper functional markets came to be, the innovative mechanisms that allow them to function, and where modern behemoths like HyperLiquid evolved from.
Introduction
In 1993, Nobel Laureate Robert Shiller published Macro Markets: Creating Institutions for Managing Society’s Largest Economic Risks. Within this flagship economic analysis, Shiller voiced his concern for a lack of liquid markets in hedging against macro-economic shocks. At the time, large institutions held derivatives contracts to hedge exposure from volatility in the securities industry. While custom-structured and OTC derivatives were in common use, the call option had been the historic standard of simple hedging on future price speculation. This contractual agreement was first utilized in ancient Greece by Thaleus of Miletus, who sought to profit from his belief in an overabundance of olives in the coming harvest. While we now live in a post Black-Scholes world where speculating on implied volatility has become as lucrative as the value of the underlying asset itself, the fundamental basis of a derivative contract still relies on the same market behavior experienced by that of Thaleus of Miletus in 600 B.C. That is, derivatives rely on settlement: the appreciation of the present versus future value of an asset. For this speculation to become liquid, there must be an order of trade. The value of the contract stems from obligation: one day the trade will have to be settled, and capital must be transferred from one party to another. As the settlement date approaches, arbitrage pushes the futures price to converge with the spot, collapsing the contracts premium or discount.
Shiller’s Macro Hedge
Capital is an ever fluid concept fueled by speculation; however, there are many capital markets that do not have a deterministic maturity. For example, examine the housing market. There is no readily available liquid market for one to manage risk on the present versus future value of their real estate; institutions may hedge using mortgage-backed securities, but this is speculation on debt and overall consumer health rather than hard asset value. A property owner may only hope for appreciation, and in a poor housing cycle, there is no securitized form of which they may take an opposing position on. In a more nuanced manner, Shiller sought to find a way to hedge macroeconomic effects on labor, stating “human capital is the greatest component of wealth, and yet there are no liquid markets on which human capital risk can be hedged”. Labor, just like housing, is a horizonless market, yet it is the backbone of every market structure and economy. However, there is something distinct that labor, housing, and every other physical market share: value in the form of dividends. In housing, it is rents, and in labor, wages. What Shiller theorized was that to create liquid speculation on cash markets, one must create hedonically based indexed dividend streams. These streams would by nature fluctuate with the market utility of the asset. With this concept, a factory worker, exposed to the risks of the manufacturing labor market, could take a short position on the manufacturing labor price index. This hedge would be equal to their wage in notional value and protect their labor value from recession.
There was one issue Shiller identified that became the central key to perpetual markets: due to the discrete nature of traditional futures, liquidity was concentrated in short term contracts, with open interest suffering from an inversely proportional relationship to maturity date. The contradiction is that this phenomenon is what anchors a futures’ value, and a perpetual future could hypothetically deviate entirely from the underliers’ spot price. To mitigate this, Shiller proposed the funding rate, the cornerstone of the perpetual market. The idea is that to keep the contract value on spot, mispricing’s are adjusted through a dividend payment from the crowd to the contrarian positions on the contract. This rate is calculated by the deviation from the spot, so the greater the inefficiency, the greater the tax on holding the deviated position. An arbitrager is then incentivized to take opposite positions on the spot and future contract. For example, in a scenario with a positive deviation, those longing the perpetual would pay the funding rate dividend to those on short. An arbitrager would then buy the spot asset while shorting the perpetual contract, profiting from the funding dividend while maintaining a neutral position. This symbiotic market mechanism was brilliant, but the gaps in technology and lack of commercial incentive limited the development of the idea, and besides some short-lived attempts, perpetuals remained a mere academic theory.
The Perpetual Exchange
In 2014 Arthur Hayes, a graduate from Wharton working as a derivatives trader in Hong Kong, founded the Bitcoin Mercantile Exchange, the first large scale platform focused on trading cryptocurrency derivatives. However, a problem faced the exchange that decoupled it from the user base generating the largest portion of revenue. Every quarter, retail traders had to close out contracts in large due to rollover and subsequently got burned by spread differentials. This was not a problem for intuitional traders who had the means and expertise to trade rolling futures; however for retail use, Hayes had to find a way to eliminate the friction of manual contract expiration. Working with a team of financial engineers, Hayes developed a proprietary form of the funding rate mechanism very similar to the one Shiller proposed decades prior.
In 2016, XBTUSD was born, BitMEX’s first perpetual future contract following the Bitcoin to USD exchange rate and allowing traders to pull up to 100x leverage. In a BitMEX blog post titled “Same Same But Different,” Hayes listed that holders of the new swap pay would receive interest on a daily basis derived from the day’s funding rate and spot price position. The funding rate mechanism made cryptocurrency trading for all consumers more efficient. The notional value of a traditional futures contract is discrete, and a trader often does not have the ability to trade according to their risk tolerance on a specific asset. With heavily volatile products such as Bitcoin futures, this was a price transparency nightmare; however, the synthetic nature of the perpetual allowed traders to take any contract at any margin, favoring the illiquid retail sector. XBTUSD embodied what cryptocurrency trading stood for at the time: high speed finance with massive leverage, accessible to everyone with more than a dollar in their brokerage account. By 2018, BitMEX was trading over $1 billion USD in daily notional value. This volume was so massive that when BitMEX’s servers went down for maintenance in August 2018, the liquidity cascade added over $5 billion USD to Bitcoin’s market cap, spiking value by 4%. After a tenured cementation as the leading centralized perpetuals exchange, BitMEX saw significant decline in 2020 when the U.S. Department of Justice charged Hayes and the founding team of violating the U.S. Bank Secrecy Act for failing to implement anti-money laundering measures on the platform. Hayes stepped down as CEO and was later found guilty in 2022, and the platform saw a mass exodus of capital.
Much of this lost capital was transferred to platforms such as Binance, and FTX, which had been extensively building their derivatives trading services behind BitMEX’s success. However, retail sentiment shifted after the collapse of FTX, which was using funds from users’ custodial wallets as leverage in Sam Bankman Fried’s trading arm, Alameda Research. Perpetual trading’s inherently crypto-native consumer base was already distrustful of centralized financial systems, and FTX’s collapse further cemented sentiment against custodial brokerage firms. Traders were upset with the lack of verifiable proof of solvency on custodial funds, and that centralized exchanges acted as the heart of a trading ecosystem, with their collapse or regulatory suppression leading to a vast erasure of capital life. A vacuum in the perpetual trading market emerged, and the race to construct the first decentralized perpetual exchange began.
Becoming Decentralized
The first two major players to enter the space were dYdX and GMX, both of whom took a unique perspective on order book design. While originally planning to build the entire trade cycle off Ethereum using smart contracts for margin trading, dYdX quickly ran into a wall of limited scalability. The intense volume of trading lead to users incurring exorbitant gas fees, up to $10 dollars per trade, with a minutes long execution period erasing the hyper-speed markets perpetual traders had become accustomed to. To mitigate this, dYdX Version 3 launched off the StarkEX ecosystem, utilizing their proprietary ZK rollup for settlement before posting the transactions on Ethereum. The issue was that the orderbook itself was entirely off chain, housed on dYdX servers. This gave dYdX control over order execution priority, as all orderbook history and trade data were transmitted through the dYdX HTTP API. This led to a mistrust between market makers and the exchange, as dYdX had the theoretical and non-auditable capability to front run their competitors’ orders. Without the full faith of these market makers, there was a lack of traders to arbitrage the mark-spot spread, leading to greater market inaccuracy and trade risk from the retail sector.
GMX took a different approach to developing a decentralized exchange, introducing the multi-asset liquidity pool. The pool acted as a house: holding assets such as Ethereum, Bitcoin, DAI and USDT from liquidity providers, who in return received 70% of trading fees. There was no CLOB, no AMM, and no funding rate; rather, the market value of traders’ position was backed by the pools’ assets in the form of collateral. Effectively, the pool was taking the opposite side of the trade, where either party had to provide the liquidity to cover the notional value of the contract. Since there was no orderbook, price discovery was built entirely on oracle price feeds. This meant that the oracle was the pivotal axis to the platform economy, and as a consequence a single point of failure. Unlike traditional perpetuals, because there was no funding rate, there was no incentive to keep position consensus spread between crowds. No matter the position held, traders paid fees to the liquidity providers for their borrowed collateral. In turn, the final flaw of GMX’s design became apparent; because there was no mechanism keeping positions evenly spread, the liquidity pool took on all losses from a winning consensus position. If a mass of traders took a successful long position on Ethereum, the fund would become significantly drained, and the value of the governance token, $GMX, would plummet.
Hyperliquid and the Modern Perp
Watching these developments, engineer and trader Jeffery Yan began to build. Perpetuals were the highest traded cryptocurrency derivative, with over $500 billion in monthly trading volume still being held on centralized exchanges. Yan saw the gap in the market, and in 2023 sought to construct what his predecessors had failed: a fully decentralized exchange. What Yan realized is that there was no existing L1 that could verify and settle trades fast enough to keep up with the hyper speed of liquidation expected by perpetual traders. So, in early 2023, Yan and his small team of engineers began building their own custom L1: HyperCore, with its own proprietary HyperBFT validator.
Unlike traditional BFT validators, HyperBFT is built off a HotStuff consensus algorithm which collapses typical O(N²) time complexity into a linear format through a leader based validator sequence. Validators both propose and verify blocks simultaneously, heavily reducing latency and allowing HyperBFT to conduct 200,000 transactions per second in 70ms finality time. HyperLiquid then runs a central limit order book through HyperCore L1, where due to the validation efficiency, traders experience price discovery at levels similar to that of centralized exchanges. Blocks posted on HyperCore run through a process of validation and clearing, where executions are posted by the validators such that the bid-ask spread is determined by the queue of transactions. The native clearing house receives the matched orders and operates as a deterministic state machine, calculating PnL, balances, and margin updates before posting the exact state of the trade on-chain. This technology was revolutionary, and allowed capital to independently flow without custodial guidance.
Within months, HyperLiquid was in beta, taking a rather humble entrance into the exchange world. In the early days, there was no incentive campaign, and their marketing was based on word of mouth. However, what they had built was so efficient and reliable that it began to snowball in user adoption. By mid 2024, HyperLiquid had nearly grown nearly 26x in trading volume, creating deep liquidity markets, attracting more market makers, and subsequently increasing the efficiency of price discovery. Through an airdrop campaign in late 2024, the native token $HYPE began trading on the platform itself, creating a buyback loop that further pushed volume and attention. With HyperLiquid’s pioneering, the total decentralized perpetual exchange market grew from just 3% of the total cryptocurrency market to over 26%, with HyperLiquid peaking at over 80% of market share, and at 38% as of May 2026. This decline is a result of the landscape HyperLiquid developed, with a mass increase in competitors entering the industry. Still, as of May 2026 HyperLiquid holds 6x the market share it did at its founding, with a market cap of over $10 billion USD, and continues to grow at rapid pace due to its innovative nature.
With the launch of HIP-3, a governance proposal allowing anyone with over 500,000 $HYPE staked to post perpetual contracts to be traded. Traditionally, perpetuals were crypto-native contracts, with the hierarchy of volume descended through Bitcoin, Ethereum, and other large-cap coins. However, with HIP-3, venues such as Trade[XYZ] opened perpetuals tracking real world assets such as XAU for gold, XAG for silver, equity indices such as the XYZ100, and most crucially, CL-USDC for tracking West Texas Intermediate crude oil futures. Trading on these markets was modest at first, but geopolitical tensions in the Middle East brought a new influx of volume. Traditional futures traded on mercantile hours, something traders speculated the U.S Government may have been using to their advantage during the beginning of the campaign in Iran. Tides in the war appeared to be announced in off-trading hours going into the weekend, possibly to mitigate commodities and securities market swings. Perpetual traders however, who had become highly adapted to hyper trading in high volatility markets, saw the opportunity to leverage Hyper Liquids 24/7 rolling contracts to trade off hour’s news. On March 9th CL-USDC spiked to $1.7 billion in trading volume, and on March 23rd the news of a strike postponement launched RWA perpetuals up to over 40% of total HyperLiquid trading volume. This trend cemented HyperLiquid as the venue for off hour price discovery.
The Ledger Lens
The future use of perpetual contract growth lies with the utility they bring to the everyday trader in regards to self custody over their financial future. Traditional commodity exchanges act as physical marketplaces where trade restrictions are applied. Originally, venues such as The Chicago Board of Trade were created to help United States grain and agricultural producers lock in forward prices for delivery, protecting them from production risks. However, speculators and trading desks quickly became involved, and much of the regulatory framework around commodities trading was centered at their interest. The consequence was that the increasingly globalized sector of agricultural producers could not access hedging utility on the goods they were producing. Essentially, global exchange frameworks cut off emerging and developing markets from participation through fiscal limits. As a result, a farmer producing 10,000 bushels of corn would need two standard CME contracts, valued at roughly $25,000, to insure themselves against potential production depreciation. A contract like this would require $3,000–$5,000 in collateral margin, a financial burden on the farmer who would only be grossing around $2,500 on that harvest. However, given the access to a collateralized wallet and internet connection, that same farmer may hedge their production risks to their specific risk tolerance through a tokenized agricultural perpetual. Oracle price feeds do not discriminate on geographic location, so the farmer receives the same price discovery as the trader commissioning the exchange of their products time zones away. Perpetuals eliminate margin monitoring, mark-to-market reporting, and quarterly contract rollovers. The utility is not just for native products; farmers may hedge the price of fertilizer, gas, and the allocation of irrigation rights.
However, this does not come without distinct downsides. While the trader who relies on decentralized frameworks for macroeconomic hedging may benefit from the complete ownership of risk, the removal of regulatory frameworks shifts the stress of the market into the participants pockets. While cases like the collapse of FTX do make arguments for a mistrust in custodial management, the ability for regulatory frameworks to provide even minimal amounts of insurance gives cushioning to the backbone of the financial systems we put so much trust in. While a validator such as HyperBFT may be nearly flawless in executing efficient market action, the risk that comes with algorithmic custody is the lack of a consistent back board to protect the trader from liquidity drainage outside of market control. Should a systemic vulnerability occur, the market participants will bear a massive burden, possibly passing it on to the broader economy without effective methods of damage mitigation. Robert Shiller’s vision for the perpetual was a means in which the working class could gain access to the protection and financial benefits of instruments reserved for the elite. However, the reliance on synthetic, deregulated markets incentives these traders to take on disproportionate risk, removing them from the stabilized upward mobility advertised by well regulated traditional markets. Yet, as institutions continue to post more capital on-chain through securities such as tokenized money market funds, the market for speculating on tokenized real world assets will continue to grow exponentially, and for better or for worse, lead to increased interest in regulatory frameworks. The question that will arise is how to fairly implement these regulations, or if further innovation can bring effective decentralized frameworks, giving both governance and responsibility to market participants.
Methodological Note
Articles, narratives, and recounts are all listed in the Work Cited below. Sources were chosen in a qualitative fashion, working to align with the linear progression of the narrative design. My goal as a narrative writer is to recount this linear progression in the most unbiased way possible, removing my own personal beliefs and any opinionated recollection. It must be noted however, that as some of the evidence presented below is anecdotal, it is always possible that facts and secondary narratives experience degrees of bias and skewedness. Upon reading my work, it is encouraged for one to continue their own research into any topics presented.
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This work is my own, and the text above has had no contribution from any AI or LLM models aside from use in graphic creation. This paper is the product of weeks of research, and the related narrative is entirely my voice.
Finian Kierstead
