Perpetual Swap Tutorial

1. The difference between perpetual Swap and traditional Swap

A Perpetual swap. is similar to a traditional Futures Contract, but the key difference is: There is no expiration or settlement of Perpetual Contracts.

Consider a Futures Contract for a physical commodity, like wheat (or gold), as an example. In traditional futures markets, these contracts are marked for delivery of the wheat - in other words, the wheat should be delivered according to the contract when the futures contract expires. As such, someone is physically holding the wheat, which results in ‘carrying costs’ for the contract. Additionally, the price for wheat may differ depending on how far apart the current time and the future settlement time for the contract is. As this gap widens, the contract’s carrying costs increase, the potential future price becomes more uncertain, and the potential price gap between the Spot and traditional Futures markets grows larger.

The Perpetual Contract is an attempt to take advantage of a Futures Contract - specifically, the non-delivery of the actual commodity - while mimicking the behavior of the Spot market in order to reduce the price gap between the Futures Price and the Mark Price. This is a marked improvement compared to the traditional Futures Contract, which can have prolonged or even permanent differences versus the Spot Price.

In order to ensure long-term convergence between the Perpetual Contract and the Mark Price, we use Funding. There are several key concepts that traders should be aware of in a Perpetual Contract:

• Mark Price: To avoid market manipulations and to ensure that the Perpetual Contract is price-matched to the Spot Price, we utilize Mark Price to calculate unrealized Profit and Loss for all traders.

• Initial and Maintenance Margin: Traders should be extremely familiar with both Initial and Maintenance Margin levels, in particular, the Maintenance Margin, where auto-liquidation will occur. It is strongly recommended that traders liquidate their positions above the Maintenance Margin to avoid higher fees from auto-liquidations.

• Funding: Payments between all longs and shorts in the Perpetual Futures Market. The Funding Rate determines which party is the payer and the payee. If the rate is positive, longs pay short; If negative, shorts pay longs.

• Risk: Unlike Spot Markets, Futures Markets allow traders to place large orders that are not fully covered by their initial collateral. This is known as ‘margin trading.’ As markets have become more technologically advanced, the amount of available margin has increased.

2. Specifications

3. Mixed margin

3.1. Account equity

The perpetual swap adopts the cross margin system, and all the underlying share the perpetual account equity.

Account equity = wallet balance + position profit and loss

3.2. Wallet Balance

The wallet balance is the sum of margin value (Calculate in USDT) in the perpetual swap account.

The wallet balance affects by the type and quantity of the margin token, the margin token/USDT trading pair index price, and the margin token discount rate.

For example: the user's perpetual swap account assets are: 1000 USDT, 3 BTC, the current BTC/USDT index price is 10000 USDT, 3 BTC discount rate is 99%.

Then the wallet balance of the user's perpetual swap account at this time = 1000 * 1 * 100% + 3 * 10000 * 99% = 30700 USDT

When using mixed margin, please note that the account equity is not only affected by the price fluctuation (holding profit and loss will be affected), but also affected by the price change of the mixed margin. Therefore, please pay attention to the risk;

3.3. Mixed margin discount

DragonEx uses the discount rate scheme of the account margin token balance to calculate the estimate margin balance in the account.

For the discount rate of each margin token, please refer to the discount rate tier.

3.4. Position profit and loss

Position profit and loss = positions cont * contract cont.value * position direction * (marked price-average position price). If the user has positions in multiple contracts, it is the sum of all positions in the perpetual swap account. Position profit and loss are calculated in USDT.

3.5. liquidation Profit

Liquidation profit = number of liquidation contract * contract cont.value * position direction * (average closing price-average holding price), liquidation profit is calculated in USDT,

If the liquidation profit is positive, the user gets USDT ( No matter you use mixed margin or not).

If the liquidation profit is negative, when the user uses the mixed margin, if the USDT in the account is sufficient, USDT will be deducted; if the USDT in the account is insufficient, after all USDT is deducted, other equivalent margin currencies (deducted other tokens) Quantity = USDT value to be deducted / USDT valuation of the currency, USDT valuation of the currency = index price of the token * discount rate).

When paying/obtaining capital fees and commissions, the processing plan is the same as the method of closing a position.

4. Mark the price

Perpetual swap contracts use the marked price to calculate the profit and loss of users' positions, effectively reducing unnecessary frequent forced liquidation during market fluctuations.

Marked price = index price * (1 + basis)

The price index is a comprehensive price index obtained by referring to the prices of a basket of major spot trading markets based on the weighted average of their trading volumes. Reference trading markets include: Bitfinex, Binance, Huobi, OKEX, Bittrex, HitBTC

We also take some additional protective measures to avoid poor market performance due to interruption of spot market prices or connection problems. These protective measures are as follows:

Single price source deviation: When the latest price of an exchange deviates from the median price of all price sources by more than 5%, the price weight of the exchange will be set to zero.

Multi-price source deviation: If the latest price of more than one exchange has a deviation of more than 5%, the median price of all price sources will replace its weighted average and be used as the price index value.

Exchange connection problem: If we cannot access the data source of the exchange, and the exchange has updated the transaction data within the last 10 seconds, we can obtain the price data from the latest results and use it for the calculation of the price index.

If an exchange does not update transaction data within 10 seconds, the weight of the exchange will be zero when calculating the weighted average.

5. Funding

5.1. Funding

Funding fee = position value * fund rate = number of positions held * face value * marked price * fund rate

5.2. Funding rate

Funding rate consists of two parts: interest rate and premium/discount. This rate is designed to ensure that the transaction price of the perpetual contract closely follows the underlying reference price. In this way, perpetual swap contracts are similar to the spot market of margin trading, where buyers and sellers exchange funds on a regular basis.

The interest rate depends on the base currency and the borrowing interest rate of the denominated currency itself.

Interest rate (I) = (quoted interest rate index-base interest rate index) / fund rate interval

Sometimes, the price of a perpetual contract has a significant premium or discount compared to the marked price. In this case, the premium index will be used to increase or decrease the next funding rate to make it in line with the current level of perpetual contract transactions. It is calculated as follows:

Premium index (P) = (Max(0, depth-weighted buying price-marked price)-Max(0, marked price-depth-weighted selling price))/spot price + reasonable basis of marked price

After determining the premium index, we set a buffer limit of 0.05% on the funding rate, so:

Funding rate (F) = premium index (P) + clamp (interest rate (I)-premium index (P), 0.05%, -0.05%)

When I-P is in the range, the fund rate F=I. At this time, we call it "Fan Value", which means that the fund rate is in the most stable range at this time.

6. Forced liquidation

6.1.  maintenance margin rate

maintenance margin rate system: The maintenance margin rate is the minimum margin required by the user to maintain the current position (position value * maintenance margin rate). When the margin is lower than the maintenance margin + liquidation fee, the forced liquidation is triggered.

If the user holds long and short positions in the same contract, the maintenance margin will be calculated as long position + short position.

For users of different position sizes, DragonEx implements a tiered maintenance margin rate system, that is, the larger the user's position, the higher the maintenance margin rate, and the lower the maximum leverage that the user can select.

Position table

6.2. Liquidation risk rate

Liquidation risk rate = (maintenance margin + liquidation fee)/account equity * 100%, when the liquidation risk rate = 100%, the liquidation will be triggered.

If the user holds positions in multiple contracts, the minimum margin requirement is the sum of the maintenance margin and closing fees of each contract.