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Am I correct in saying that with the leverage system in crypto perpetual futures contracts, the user does not borrow from the exchange and the exchange does not have to borrow from external sources to "fund the leverage"?

Who pays the shorts profit if the long counterparty bought without leverage?

Is each trade matched with longs and shorts of the same X leverage? (e.g both sides have 5X leverage) or 1 long of 10,000 USD notional value can be matched with 100 short contracts if each contract is worth $100 of notional value. Thank you.

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Think about it as:

  • An individual A enters short 1 btc-perp (currently at 20kusdt) contract 2x leverage is equivalent to:
    • The individual post 0.5 * btcusdt (10k usdt) as a margin to the exchange, and the exchange let him/her take a 1 contract exposure.
    • The individual A (short) enters short 1 contract in the market with the individual B (long)

If the price of the btc increases by 50% (new price 30k) then the exchange will take over the position, use the 10k to pay the long contract, and close the short contract (enter in a long contract) in the market to another participant (individual C) willing to enter a short at 30k.

the exchanges will run no risk:

  1. initial position 0.
  2. end position 1 short + 1 long = 0 (technically exchange will make a profit due to liquidation fees, trading fees etc)

overall positions:

  1. exchange 1 short + 1 long
  2. Individual A 0
  3. Individual B 1 long
  4. Individual C 1 short
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    $\begingroup$ Thank you for the great answer. So the user does not "borrow" in the traditional sense from the exchange and the funding rate is not "interest" for borrowing money but is used to bind the contract price to spot. The exchange's risk and matching system just allows users to take contract exposures higher than their margin without the user borrowing or paying interest on a loan. Is my understanding correct? Thanks. $\endgroup$
    – VoltageC
    Commented Nov 2, 2022 at 15:29
  • $\begingroup$ correct, that article can be useful as well blog.ftx.com/blog/maring-vs-futures $\endgroup$
    – MaPy
    Commented Nov 7, 2022 at 15:20

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