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MCS | What is the Dual Price Mechanism in Perpetual Contracts?

7 days ago

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*This post has been written by Hedgehog, an MCS influencer and one of Korea's famous cryptocurrency key opinion leaders.

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Greetings from MCS, the derivatives trading platform where traders ALWAYS come first.

As a cryptocurrency perpetual contract trader, you may have seen the index price and the mark price at least once while trading. It seems that many traders are confused about the differences between the index price and the mark price, so I will explain these two prices and the dual price mechanism used in perpetual contracts.

🎯 What is the Dual Price Mechanism?

The dual price mechanism consists of the mark price and the last traded price. This mechanism protects traders from damages caused by market manipulation, lack of liquidity, or differences in spot prices and futures prices. It also provides a fair trading environment for all traders on MCS, and is used to minimize the price gap between spot prices and the perpetual contract prices.

In order to fully understand the concept of mark price, you first need to know the concept of index price.

🎯 Index Price

You can think of the index price as a spot price. The MCS cryptocurrency derivatives exchange refers to a total of 7 exchanges to calculate the BTC/USDT index price, and the exchanges are Binance, Bitfinex, Huobi Global, OKEX, Bittrex Global, HitBTC, and Poloniex. So basically, the index price of the MCS BTC/USDT perpetual contract is the average price of the same cryptocurrency pair's prices on the aforementioned 7 global exchanges.

🎯 Mark Price

The mark price is the price reflecting the status at-the-moment of the MCS exchange to the index price. The mark price is also known as the fair price in some exchanges. The formula for calculating the mark price is "Index Price * (1 + Funding Basis)", and the formula for calculating the funding basis is "Current Funding Ratio * Time Remaining Until Funding Settlement / Funding Interval". Since the calculated mark price represents a more accurate perpetual contract price, the MCS cryptocurrency derivatives exchange uses this mark price as a measure to trigger the liquidation.

🎯 Last Traded Price

The last traded price is the market price of a pair (like BTC/USDT) on the MCS exchange. In short, it refers to the most recent price of the actual trade on MCS.

If you have understood the concepts of each of the above terms, this question will pop up in your head: "so, why do we need a dual pricing mechanism?" Let me answer that question with an example.

🎯 Why Use The Dual Price Mechanism

[Example]

The mark price and the last traded price are at similar levels of 10,000 USDT and 10,001 USDT, respectively. At this time, Bob wants to enter a short position with 100x leverage using his entire Bitcoin inventory on MCS. At that moment, the last traded price suddenly drops to 5,000 USDT causing the rapid fluctuation in price. Nevertheless, the mark price remains at 10,000 USDT.

In this situation, if the last traded price was used as a measure of liquidation, most of the long-positions with leverage would have been liquidated. Therefore, in order to prevent unfair liquidation like the case above, MCS applies the dual price mechanism.

   

I am a Bitcoin margin trader, Hedgehog. Thank you for reading this post.

     

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Thank you.

           

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Published 7 days ago