How does the DigiFinex perpetual contract work?

DigiFinex perpetual contracts offer leveraged trading opportunities with no expiration date, utilizing a funding rate mechanism to align the contract price with the spot market.

Nov 26, 2024 at 02:57 am

How Does the DigiFinex Perpetual Contract Work?

DigiFinex, a leading digital asset exchange, offers a perpetual contract trading platform that allows traders to speculate on the future price of cryptocurrencies without owning the underlying asset. Perpetual contracts are similar to futures contracts but do not have a set expiration date, enabling traders to hold positions indefinitely. Here's a comprehensive guide to how DigiFinex perpetual contracts work:

1. Understanding Perpetual Contracts:

• Perpetual contracts are derivative instruments that track the spot price of an underlying cryptocurrency.
• They allow traders to take long (buy) or short (sell) positions, speculating on whether the price will rise or fall.
• Unlike futures contracts, perpetual contracts do not have a fixed expiration date and can be held indefinitely.

2. Funding Rate Mechanism:

• To maintain the perpetual contract price aligned with the spot price, DigiFinex employs a funding rate mechanism.
• The funding rate is a periodic payment made between long and short positions, adjusted every eight hours.
• Traders with long positions pay a funding fee to those with short positions if the perpetual contract price is above the spot price, and vice versa.

3. Mark Price Calculation:

• The mark price is the reference price used for margin calculations, liquidations, and funding rate calculations.
• It is derived from the weighted average price of recent spot trades on multiple exchanges, providing a reliable representation of the underlying asset's value.

4. Margin Trading:

• Perpetual contracts on DigiFinex employ margin trading, enabling traders to leverage their positions by borrowing funds from the exchange.
• The margin ratio represents the percentage of capital required to open a position, with lower margin ratios offering higher leverage.
• Traders must maintain sufficient margin balance to cover potential losses and avoid margin calls.

5. Liquidations:

• Margin trading carries the risk of liquidation if a trader's equity falls below a certain threshold.
• In such cases, the exchange forcibly closes the trader's position, selling or buying the underlying asset to cover the losses.
• To prevent unnecessary liquidations, traders should monitor their margin levels and use stop-loss orders to limit potential losses.

6. Auto-Deleveraging (ADL):

• DigiFinex employs an Auto-Deleveraging (ADL) mechanism to reduce systemic risk in extreme market conditions.
• If the market experiences a sudden and significant price movement, ADL may trigger the liquidation of leveraged positions to prevent sharp price swings.

7. Risk Management:

• Perpetual contract trading requires careful risk management to minimize losses.
• Traders should employ strategies such as position sizing, stop-loss orders, and hedging to manage their exposure to market volatility.
• It's crucial to understand the risks involved before engaging in perpetual contract trading.