Recently, a friend asked me, "Who exactly is making money when contracts get liquidated?" That's a good question because many people don't really understand the underlying logic.

Simply put, the money flow in perpetual contracts works like this:

The funding rate is entirely paid to the counterparty. The margin you lose is mainly taken by the opposing side. But if the market moves extremely and causes a liquidation, the excess loss is absorbed by the platform. However, nowadays platforms have an ADL (Auto-Deleveraging) mechanism that forces liquidation to prevent this situation. As for trading fees, the platform takes the majority and shares a portion with market makers as an incentive. There's a common misconception to clarify: exchanges do not act as counterparties; the real market makers are the liquidity providers, not the platform's reserve funds.

Since liquidations are so common, I’ll break down the underlying mechanism so everyone can understand why liquidations happen so easily.

First, the funding rate. Perpetual contracts need to stay aligned with the spot price, and exchanges adjust this via the funding rate. If the funding rate is positive, longs pay shorts; if negative, shorts pay longs. This settlement occurs roughly every 8 hours. The calculation is simple: the payment equals the trading volume times the funding rate, and trading volume is your principal multiplied by leverage.

Next, leverage. This is the main culprit behind liquidations. Many beginners lose money because of leverage. Leverage can amplify gains but also risks, especially fueling greed. Contract leverage can be set from 1x up to 125x. For example, at 100x leverage, a 1-point price move can double your profit. That’s why some people, after losing, can’t resist increasing leverage and end up liquidated. To avoid liquidation, controlling your leverage is key.

Finally, trading fees. For example, on a major exchange, taker fees are 0.05%, and maker fees are 0.02%. Both buying and selling incur fees, regardless of your position. The calculation is simply: trading volume times the fee rate.

So, as you can see, the money flow in the contract market is logical. Most losses are taken by the opposing side, and the platform profits from trading fees and, in extreme cases, liquidations. To survive longer in this market, you need to understand these mechanisms, especially be clear about leverage and liquidation risks.