# 10 Bets, 10 Losses? Decoding the "Fatal" Risks of Perpetual Contracts and Exchanges' "Unbeatable" Strategies

By [Bitcoin Ecosystem](https://paragraph.com/@bitcoin-ecosystem) · 2025-07-30

decoding

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Liquidation and settlement are the "destiny" that exchanges and every trader must face sooner or later. If opening a position is the beginning of a relationship, filled with emotions, beliefs, and illusions; then closing a position is the end of that story, whether willingly or reluctantly.

  

In fact, forced liquidation is a "thankless task" for exchanges. Not only does it offend users, but a single misstep can easily drag the exchange itself into trouble—and no one will pity it when that happens. So, mastering the art of balancing strength and flexibility is truly a skill.

  

On a side note, forget about the wealth-creation hype—the liquidation mechanism is the true measure of an exchange's integrity and responsibility.

  

Today, we’ll only discuss structures and algorithms. What is the real logic behind forced liquidation? How does the liquidation model protect overall market safety?

  

A note to naysayers: If you think I’m wrong, then you’re right.

  

A note for entertainment: Don’t focus too much on numbers; pay more attention to the logic. Just get the general idea and enjoy the read.

  

**Part 1: Core Risk Management Framework for Perpetual Contracts**  
Perpetual contracts, as complex financial derivatives, allow traders to amplify capital effects through leverage, offering the potential for returns far exceeding initial capital. However, this potential for high returns comes with equal or even greater risks. Leverage magnifies not only potential profits but also potential losses, making risk management an indispensable core link in perpetual contract trading.

  

The core of this system lies in effectively controlling and resolving systemic risks arising from high-leverage trading. It is not a single mechanism but a "terrace-style" risk control process composed of multiple interconnected, hierarchically triggered defense layers. This process aims to limit losses from individual account liquidations to a controllable range, preventing them from spreading and impacting the entire trading ecosystem.

  

The goal is to transform the force of a waterfall into the gentleness of a stream—comprehensive yet flexible, firm yet yielding.

  

**Three Pillars of Risk Mitigation**  
An exchange’s risk management framework relies primarily on three pillars, which together form an all-round defense network from individual to system, and from routine to extreme:

  

*   **Forced Liquidation**: This is the first and most commonly used line of defense. When market prices move against a trader’s position, causing their margin balance to be insufficient to maintain the position, the exchange’s risk engine automatically intervenes to forcibly close the losing position.
    
*   **Insurance Fund**: This is the second line of defense, acting as a buffer for systemic risks. During severe market fluctuations, the execution price of forced liquidation may be worse than the trader’s bankruptcy price (i.e., the price at which losses exhaust all margin). The resulting additional losses (known as "negative balance losses") will be covered by the insurance fund.
    
*   **Auto-Deleveraging (ADL)**: This is the final and rarely triggered ultimate line of defense. It is only activated during extreme market conditions (i.e., "black swan" events) when large-scale forced liquidations deplete the insurance fund. ADL compensates for negative balance losses that the insurance fund cannot cover by forcibly reducing the most profitable, highest-leverage opposing positions in the market, ensuring the exchange’s solvency and the final stability of the entire market.
    

  

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

  

Traders bear the risk → Insurance Fund → Auto-Deleveraging (ADL)

  

First, risks are borne by individual traders, whose responsibility is to ensure sufficient margin in their accounts. When individual responsibilities cannot be fulfilled, risks are transferred to a collectively pre-funded buffer pool (via liquidation fees, etc.)—the insurance fund. Only in extreme cases where this collective buffer pool cannot withstand the impact are risks directly transferred to the most profitable market participants through ADL. This layered mechanism aims to isolate and absorb risks to the greatest extent, maintaining the health and stability of the entire trading ecosystem.

  

**Part 2: Foundations of Risk: Margin and Leverage**  
In perpetual contract trading, margin and leverage are the two most basic elements determining a trader’s risk exposure and potential profit/loss scale. A deep understanding of these concepts and their interaction 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:

  

*   **Initial Margin**: This is the minimum collateral required to open a leveraged position. It is the "ticket" for traders to enter leveraged trading, and its amount is usually the nominal value of the position divided by the leverage multiple. For example, to open a position worth 10,000 USDT with 10x leverage, a trader needs to invest 1,000 USDT as initial margin.
    
*   **Maintenance Margin**: This is the minimum collateral required to maintain an open position. It is a dynamically changing threshold lower than the initial margin. When market prices move unfavorably, causing the trader’s margin balance (initial margin plus or minus unrealized profits/losses) to fall to the maintenance margin level, the forced liquidation process is triggered.
    
*   **Maintenance Margin Ratio (MMR)**: Refers to the minimum collateral ratio.
    

  

**Margin Modes Explained: A Comparative Analysis**  
Exchanges typically offer multiple margin modes to meet different traders’ risk management needs. The main ones include the following three:

  

*   **Isolated Margin**: In this mode, traders allocate a specific amount of margin to each individual position. The risk of the position is isolated; if forced liquidation occurs, the maximum loss borne by the trader is limited to the margin allocated to that position, without affecting other funds or positions in the account.
    
*   **Cross Margin**: In this mode, all available balances in the trader’s futures account are treated as shared margin for all positions. This means losses from one position can be offset by other available funds in the account or unrealized profits from other profitable positions, reducing the risk of forced liquidation for individual positions. However, the trade-off is that once forced 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 mode designed for experienced institutional or professional traders. It assesses margin requirements based on the overall risk of the entire portfolio (including spot, futures, options, and other products). By identifying and calculating risk hedging effects between different positions, the portfolio margin mode can significantly reduce margin requirements for well-hedged, diversified portfolios, thereby greatly improving capital efficiency.
    

  

**Tiered Margin System (Risk Limits)**  
To prevent large liquidation orders from causing significant impacts on market liquidity, exchanges generally implement a tiered margin system, also known as risk limits. The core logic of this system is: larger position sizes carry higher risks and therefore require stricter risk control measures.

  

Specifically, the system divides the nominal value of positions into multiple tiers. As the value of a trader’s position rises from lower tiers to higher tiers, the platform automatically implements two adjustments:

  

1.  Reducing the maximum available leverage multiple: larger positions allow lower maximum leverage.
    
2.  Increasing the maintenance margin ratio (MMR): larger positions require a higher proportion of margin relative to the position value.
    

  

This design effectively prevents traders from using high leverage to build large, fragile positions that could pose systemic threats to market stability. It is a built-in risk mitigation 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 exchanges to manage market liquidity and prevent "liquidation cascades." A large-scale liquidation order (e.g., from a high-leverage "whale" account) can instantly deplete liquidity across multiple price levels in the order book, causing sharp price drops with "long lower shadows." Such sudden price plunges may trigger liquidation lines for other originally safe trader positions, creating a domino effect (i.e., negative balance risks for the exchange).

  

By imposing lower leverage and higher maintenance margin requirements on large positions, exchanges significantly increase the difficulty for individual entities to build large, fragile positions that could trigger such chain reactions. Higher margin requirements act as a larger buffer, absorbing more severe price fluctuations and protecting the entire market ecosystem from systemic risks caused by concentrated positions.

  

Take Bitget’s tiered margin system for BTCUSDT perpetual contracts as an example, which clearly demonstrates the practical application of this risk management mechanism:

**Table 1: Example of Tiered Margin for BTCUSDT Perpetual Contracts (Source: Bitget)**  
The table intuitively reveals the inverse relationship between risk and leverage—the margin requirement increases linearly with position size. When a trader’s BTCUSDT position value exceeds 150,000 USDT, the maximum available leverage drops from 125x to 100x, and the maintenance margin ratio increases from 0.40% to 0.50%.

**Part 3: Liquidation Triggers: Understanding Key Price Indicators**  
To execute forced liquidation accurately and fairly, an exchange’s risk engine does not directly use the rapidly changing transaction prices in the market but relies on a specially designed system of price indicators.

**Mark Price vs. Last Traded Price**  
On a perpetual contract trading interface, traders typically see two main prices:

*   **Last Traded Price**: This refers to the price of the latest transaction executed on the exchange’s order book. It directly reflects current market buying and selling behavior and is easily influenced by large single transactions or short-term market sentiment.
    
*   **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 last traded price, the calculation of the mark price integrates multiple data sources, with the core purpose of smoothing short-term price fluctuations and preventing unnecessary or unfair forced liquidations caused by insufficient market liquidity, price manipulation, or sudden "spike" . (Mark price is now used as the basis for profit and loss calculations.)
    

The calculation method of mark price is similar across exchanges, usually including the following core components:

*   **Index Price**: This is a composite price calculated by weighting the asset prices of multiple major global spot exchanges.
    
*   **Funding Basis**: To anchor the perpetual contract price near the spot price, there is a spread between the contract price and the index price, known as the basis.
    

Through this comprehensive calculation method, the mark price can more stably and reliably reflect the intrinsic value of the asset, becoming the sole basis for triggering forced liquidation. (For detailed mark price calculations, see:  
[https://x.com/agintender/status/1944743752054227430,  
https://x.com/agintender/status/1937104613540593742](https://x.com/agintender/status/1944743752054227430,￼https://x.com/agintender/status/1937104613540593742))

**Liquidation Price and Bankruptcy Price**  
Within the mark price system, there are two critical price thresholds that determine a trader’s fate:

*   **Liquidation Price**: This is a specific value of the mark price. When the market’s mark price reaches or crosses this point, the trader’s position will trigger the forced liquidation process. This price point corresponds to the trader’s margin balance exactly falling to the maintenance margin requirement. (The liquidation price is the trigger condition for liquidation.)
    
*   **Bankruptcy Price**: This is another value of the mark price, representing the price point at which the trader’s initial margin is completely depleted. In other words, when the mark price reaches the bankruptcy price, the trader’s margin balance will be zero. (The bankruptcy price is the price used for liquidation.)
    

Note that the liquidation price is always triggered before the bankruptcy price.

The price range between the liquidation price and the bankruptcy price forms the "operational buffer zone" of the exchange’s risk engine. The efficiency of the liquidation system is tested within this narrow range.

Simply put, the higher the leverage multiple, the lower the initial margin ratio, and the narrower this buffer zone. For example, a position with 100x leverage has an initial margin ratio of only 1% and a maintenance margin ratio of perhaps 0.5%. This means traders have only a 0.5% price fluctuation range from opening a position to triggering liquidation.

for example, if you open a long position with 100x leverage, intuitively, you would "go bankrupt" only if the price drops by 1%. However, because the maintenance margin ratio is 0.5%, liquidation will be triggered when the price drops by 0.5%, and liquidation will be executed at the bankruptcy price (a 1% drop).

This direct causal relationship between leverage and vulnerability is the fundamental reason why high-leverage trading is extremely risky and counterintuitive.

  
If the liquidation engine can efficiently close the position within this range at a price better than the bankruptcy price, the remaining "profits" will be injected into the insurance fund, and the user will not "owe money" to the exchange.

Conversely, if extreme market fluctuations or liquidity depletion cause the liquidation price to be worse than the bankruptcy price, the resulting negative balance losses will need to be covered by the insurance fund, or even by the user

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*Originally published on [Bitcoin Ecosystem](https://paragraph.com/@bitcoin-ecosystem/10-bets-10-losses-decoding-the-fatal-risks-of-perpetual-contracts-and-exchanges-unbeatable-strategies)*
