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What are Perpetual Contracts

6 months ago

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The topic of this post is "Perpetual Contract".

             

A perpetual contract is a financial derivatives product normally referred to as "Cryptocurrency Futures". It is similar to spot and futures trading, but is clearly different from the spot and has the following unique characteristics.

                   

1. No Maturity nor Settlement Date

Unlike futures contracts where spot transactions must occur at some point, a perpetual contract has no maturity date or daily settlement. There is also no need for rollover costs when extending the contract. This is in contrast to spot trading, which requires immediate settlement and has the advantage of allowing you to liquidate your assets when you want them. For futures contracts, futures and spot prices meet at maturity, but a perpetual contract has no settlement date, so there is always a gap between futures and spot prices. To close this gap, the mark price and funding mechanism are used. Traders must trade in consideration of the funding cost or the funding revenue incurred every eight hours.

             

2. Dual Price Model

The dual price model, which consists of Mark Price and Last Traded Price, is one of the mechanisms to link futures and spot market prices. It also protects traders from despiteful  damages caused by market manipulation, lack of liquidity or deviations from spot and futures prices, and limits the creation of an unfair environment.

                       

3. Up to 100:1 Leverage

A perpetual contract allows you to trade with up to 100x leverage. A perpetual contract offers a much wider range of leverage, compared to the leverage offered by spot margin or futures trading, which is 3 to 5 times and 5 to 20 times, respectively. This allows traders to manage their portfolio in a variety of ways, at any time to adjust the leverage and margin of open positions, and to provide flexible risk management.

                     

4. Auto-Deleveraging (Contract Loss Mechanism)

The cryptocurrency market has large price volatility and positions can be liquidated. One might question who would cover the contract loss during liquidation. Originally, the loss should be covered by the insurance fund; however, if the loss is beyond the ability of the insurance fund, the auto-deleveraging will liquidate traders of opposite positions in the order of high profit and high risk.

                                     

In the upcoming posts, we will take a closer look at the characteristics mentioned above.

   

MCS will consider traders at the first.

Thank you.

   

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Published 6 months ago