What is a Perpetual Contract?
A perpetual contract is a USDT-settled virtual contract product similar to traditional futures contracts. The key distinction is that perpetual contracts have no expiration or settlement date, offering greater convenience. Additionally, they provide higher leverage than traditional futures contracts. Leverage enables users to trade with larger positions with the same capital, amplifying both potential profits and losses.
Margin
Margin refers to the capital required by users when participating in contract trading and opening positions.
Position Margin = Initial Margin of the Position + Closing Fee. In isolated margin mode, users can add or reduce margin on their positions, but the margin must not be less than the initial margin of the position + closing fee.
Initial Margin is the minimum amount required to open a position. Initial Margin = (Position Value / Leverage) + Closing Fee
Maintenance Margin is the minimum amount required to maintain the current position. Maintenance Margin = (Position Value × Maintenance Margin Ratio) + Closing Fee The maintenance margin amount is related to the position value and maintenance margin ratio, which is in turn related to the risk limit.
Mark Price
The mark price is a weighted price based on external markets, adjusted by the funding fee basis that decays over time. Forced liquidations are judged based on the mark price, not the in-market transaction price. Using the mark price prevents market manipulation that could trigger unnecessary forced liquidations and helps anchor in-market prices to external spot market prices.
Forced Liquidation
If the margin balance falls below the maintenance margin level (maintenance margin ratio ≥ 100%), the position will be forcefully liquidated.
Unrealized profits and losses are calculated using the mark price as the closing price to determine the floating profit or loss.
The mark price at the time of triggering forced liquidation is the liquidation price. Forced liquidation processes are completed using the market itself, the insurance fund and the auto-deleveraging (ADL) system.
In a contract, the maintenance margin ratio is fixed, while the initial margin is related to leverage. The higher the leverage, the lower the initial margin, making it easier for forced liquidation to occur. On the other hand, the higher the leverage, the larger the profit potential and the risk is proportional to the reward.
Insurance Fund
Forced liquidation orders are placed at the bankruptcy price.
The bankruptcy price is the mark price at which the position margin balance (including unrealized profits and losses) equals only the closing fee.
If the actual execution price is better than the bankruptcy price, the remaining amount (i.e., the smaller loss) will be added to the insurance fund.
If the mark price breaches the bankruptcy price and the forced liquidation order is still not executed, the insurance fund will be used to cover the liquidation order.
Auto-Deleveraging (ADL) Mechanism
In forced liquidation, if the insurance fund is insufficient to cover the liquidation orders, the auto-deleveraging (ADL) mechanism is triggered. The system selects the user with the highest unrealized profits to reduce their positions and complete the unexecuted liquidation orders.
The selection of users for ADL is based on the formula: "Unrealized Profit × Leverage." If the user is in cross margin mode and has not set leverage limits, the system uses the maximum leverage for their position.Users who are selected for auto-deleveraging will have their unfilled orders canceled first.
Position Modes
Currently, the system supports two modes: isolated margin and cross margin.
Isolated Margin Mode: In isolated margin mode, each position's margin operates independently with a fixed allocation and remains separate from other positions. The position margin represents the user's maximum potential loss.
Cross Margin Mode: In cross margin mode, all positions share the combined margin in the contract account. Users may designate multiple contracts to operate in cross margin mode. If the total maintenance margin ratio falls below 100%, forced liquidation will be triggered, potentially resulting in loss of the entire account balance. However, unrealized profits from winning positions cannot be utilized as margins for other positions.
Glossary of Related Terms:
Fund Transfer: Used to transfer funds between the user's different accounts (funds, spot, contract).
Position Margin: The margin used for a position, i.e., the opening margin.
Order Margin: The margin used by unfilled orders, including fees and is frozen.
Realized Profit and Loss: The actual profit or loss obtained after closing positions, which can be used as margin or withdrawn.
Unrealized Profit and Loss: The profit or loss of currently held positions that have not been closed, also called floating profit or loss.
Direction: Refers to buying long or selling short.
Leverage: The leverage used when opening a position.
Position: The amount of the opened position.
Position Value=The latest price × Position Quantity.
Position Margin: The margin used for the position, which is frozen and changes with market price fluctuations.
Isolated Margin Mode: Users can adjust position margin at any time.
Cross Margin Mode: Does not support margin adjustments.Opening Price: The average price at which the position was opened.
Estimated Liquidation Price: The price at which the system will initiate forced liquidation.
Margin Ratio: Position Margin / Position Value.
Unrealized Profit and Loss: The floating profit or loss for open positions.