Deconstructing the "Fate" of Perpetual Futures Risks and the "Invincible" Path of the exchange

Closing positions and liquidation are the "fate" that every exchange and trader must face sooner or later. If opening a position is the beginning of a relationship, filled with emotions, beliefs, and fantasies; then closing a position is the end of that story, whether willingly or with reluctance.

In fact, forced liquidation is a "thankless task" for the exchange. It not only offends users but can also inadvertently put itself at risk, and when that happens, no one usually sympathizes. Therefore, how to achieve "the longer the inch, the stronger the inch; the deeper the inch, the shallower the inch" is the true skill.

It is worth mentioning that you shouldn't pay too much attention to the so-called wealth creation effect—it's the clearing mechanism that reflects the conscience and responsibility of an exchange.

Today, we will focus on structure and algorithms. What is the real logic behind forced liquidation? How does the clearing model protect overall market safety?

Statement: This article is for reference only and does not constitute any investment advice. If you have different views, you are welcome to discuss rationally.

Entertainment Statement: The numbers are for reference only, the focus is on understanding the logic. Everyone can just get a general idea, it's enough to enjoy.

Part One: Core Risk Management Framework for Perptual Futures

Perptual Futures, as a complex financial derivative, allow traders to amplify capital effects through leverage, providing the opportunity to achieve returns far exceeding the initial capital. However, this high return potential is accompanied by equal or even higher risks. Leverage not only amplifies potential profits but also potential losses, making risk management an indispensable core component of Perptual Futures trading.

The core of this system lies in effectively controlling and mitigating the systemic risks arising from high-leverage trading. It is not a single mechanism, but rather a "terraced" risk control process composed of multiple interrelated and progressively triggered defensive layers. This process aims to limit the losses caused by individual account liquidations to a manageable range, preventing their spread and impact on the entire trading ecosystem.

How to transform the momentum of a waterfall into the gentleness of a stream - sparse yet not leaking, strength within softness.

The Three Pillars of Risk Mitigation

The risk management framework of the exchange mainly relies on three pillars, which together form a comprehensive defense network from individual to system, from routine to extreme:

1. 强制平仓(Forced Liquidation): This is the first line of risk management and also the most commonly used line of defense. When the market price moves in an unfavorable direction for the trader's position, causing their margin balance to be insufficient to maintain the position, the exchange's risk engine will automatically intervene to forcibly close the losing position.

2. Risk Assurance Fund ( Insurance Fund ): This is the second line of defense, serving as a buffer for systemic risk. During significant market fluctuations, the execution price of forced liquidation may be worse than the trader's bankruptcy price (, which is the price at which all margin is exhausted ), resulting in additional losses (, known as "liquidation losses" ), will be compensated by the Risk Assurance Fund.

3. Auto-Deleveraging Mechanism ( Auto-Deleveraging, ADL ): This is the last line of defense and is rarely triggered. The ADL mechanism will only be activated in extreme market conditions (, known as "black swan" events ), which lead to large-scale forced liquidations exhausting the risk protection fund. It compensates for the losses beyond the coverage of the risk protection fund by forcibly reducing the most profitable and highly leveraged opposing positions in the market, thereby ensuring the exchange's solvency and the ultimate stability of the entire market.

These three pillars together form a logically sound risk control chain. The design philosophy of the entire system can be understood as an economic "social contract", which clarifies the principle of hierarchical distribution of risk responsibility in the high-risk environment of leveraged trading.

Traders bear ——> Risk Protection Fund ——> Automatic Liquidation Mechanism ( ADL )

First, the risk is borne by the individual trader, who is responsible for ensuring that the account has sufficient margin. When individual responsibility cannot be fulfilled, the risk is transferred to a collective buffer pool, which is pre-funded by the collective ( through clearing fees, etc. Only in extreme situations where this collective buffer pool is also unable to withstand the impact does the risk transfer directly to the most profitable participants in the market in the form of automatic liquidation. The design of this layered mechanism aims to isolate and absorb risks to the greatest extent possible, maintaining the health and stability of the entire trading ecosystem.

![10 bets 10 loses? Deconstructing the "fate" of Perptual Futures risks and the "invincible" path of the exchange])https://img-cdn.gateio.im/webp-social/moments-117858ca447709cf6cff13fcdee729f9.webp(

Part Two: The Basics of Risk: Margin and Leverage

In Perptual Futures trading, margin and leverage are the two fundamental elements that determine the trader's level of risk exposure and the potential scale of profit and loss. A deep understanding of these concepts and their interactions is a prerequisite for effective risk management and avoiding forced liquidation.

) Initial Margin and Maintenance Margin

Margin is the collateral that traders must deposit and lock in to open and maintain leveraged positions. It is divided into two key levels:

• 初始保证金###Initial Margin(: This is the minimum collateral amount required to open a leveraged position. It serves as the "ticket" for traders to enter leveraged trading, and its amount is usually the nominal value of the position divided by the leverage multiplier. For example, to open a position worth 10,000 USDT with 10x leverage, the trader needs to put in 1,000 USDT as initial margin.

• Maintenance Margin ): This is the minimum collateral amount required to maintain an open position. It is a dynamically changing threshold, lower than the initial margin. When the market price moves unfavorably, causing the trader's margin balance ( initial margin plus or minus unrealized profit and loss ) to fall to the maintenance margin level, the liquidation process will be triggered.

• Maintenance Margin Ratio (: refers to the minimum collateral ratio

) Margin Model Analysis: Comparative Analysis

Exchanges usually offer various margin models to meet the risk management needs of different traders. The main ones include the following three:

• Isolated Margin(: In this mode, traders allocate a certain amount of margin for each position separately. The risk of this position is independent, and if forced liquidation occurs, the maximum loss borne by the trader is limited to the margin allocated for that position, which will not affect other funds in the account or other positions.

• 全仓保证金)Cross Margin###: In this mode, all available balances in the trader's futures account are considered as shared margin for all positions. This means that losses from one position can be offset by other available funds in the account or unrealized profits from other profitable positions, thereby reducing the risk of a single position being liquidated. However, the cost is that once liquidation is triggered, the trader may lose all funds in the account, not just the margin for a single position.

• Portfolio Margin (: This is a more complex margin calculation model designed for experienced institutions or professional traders. It assesses margin requirements based on the overall risk of the entire portfolio ), which includes various products such as spot, futures, options, etc. By identifying and calculating the risk hedging effects between different positions, the Portfolio Margin model can significantly reduce the margin requirements for well-hedged, diversified portfolios, thereby greatly improving capital efficiency.

( Tiered Margin System ) Risk Limit (

In order to prevent a significant impact on market liquidity during forced liquidation due to a single trader holding an excessively large position, exchanges generally implement a tiered margin system, also known as risk limits. The core logic of this system is: the larger the position size, the higher the risk, therefore stricter risk control measures are required.

Specifically, the system divides the nominal value of positions into multiple levels )Tiers(. As the value of the positions held by traders rises from lower levels to higher levels, the platform will automatically implement two adjustments:

1. Lower the maximum available leverage multiplier: The larger the position, the lower the maximum leverage allowed.

2. Increase Maintenance Margin Rate ) MMR ###: The larger the position, the higher the proportion of margin required to maintain the position relative to the value of the position.

This design effectively prevents traders from using high leverage to establish large positions that could pose a systemic threat to market stability. It is a built-in risk reduction mechanism that forces large traders to actively reduce their risk exposure.

The tiered margin system is not just a risk parameter, but a core tool for the exchange to manage market liquidity and prevent "liquidation cascades" (. A large-scale forced liquidation order, for instance, from a whale account using high leverage, can instantly deplete liquidity at multiple price levels on the order book, leading to a severe price drop with a "long lower shadow". This sudden price crash may trigger the forced liquidation lines of other positions that were originally safe, thus creating a domino effect. For the exchange, this translates to the risk of being liquidated ).

By applying lower leverage and higher maintenance margin requirements to large positions, the exchange has greatly increased the difficulty for a single entity to build up a vulnerable large position that could trigger such a chain reaction. Higher margin requirements act as a larger buffer, capable of absorbing more intense price fluctuations, thereby protecting the entire market ecosystem from the systemic risks posed by concentrated positions.

Taking the tiered margin system set by a certain exchange for BTCUSDT Perptual Futures as an example, it clearly demonstrates the practical application of this risk management mechanism:

The table intuitively reveals the inverse relationship between risk and leverage—the requirement for margin rate increases linearly with the position size. When the value of the trader's BTCUSDT position exceeds 150,000 USDT, the maximum available leverage will decrease from 125 times to 100 times, while the margin rate will also increase from 0.40% to 0.50%.

Part Three: Liquidation Trigger: Understanding Key Price Indicators

In order to execute forced liquidation accurately and fairly, the exchange's risk engine does not directly use the rapidly changing market transaction prices, but relies on a specially designed price indicator system.

( Mark Price vs. Latest Transaction Price

On the Perptual Futures trading interface, traders usually see two main prices:

• Latest Transaction Price ) Last Price (: This refers to the price of the most recent transaction on the exchange order book. It directly reflects the current market buying and selling behavior, and is easily influenced by large single transactions or short-term market sentiment.

• Mark Price) Mark Price(: This is a price specifically calculated by the exchange to trigger forced liquidation, aiming to reflect the "fair value" or "true value" of the contract. Unlike the latest transaction price, the calculation of the mark price incorporates multiple data sources, with the core purpose of smoothing short-term price fluctuations to prevent unnecessary and unfair forced liquidations caused by insufficient market liquidity, price manipulation, or sudden "spike" conditions.) The mark price is now used as the basis for profit and loss(.

The calculation method for the mark price is generally similar across exchanges and usually includes the following core components:

1. 指数价格)Index Price(: This is a composite price calculated through a weighted average of asset prices from several major global spot exchanges.

2. Funding Basis ): In order to anchor the Perptual Futures price near the spot price, there will be a price difference, known as the basis, between the contract price and the index price.

Through this comprehensive calculation method, the mark price can be more stable and more