BroadChain News, April 24, 20:16. In 2016, BitMEX put into practice the perpetual derivative concept proposed by Robert Shiller in 1993, launching the XBTUSD perpetual contract. Initially seen as a 100x leverage toy for geeks, this product captured 93% of the crypto derivatives market's traffic a decade later, processing nearly $200 billion in daily trading volume. The sophisticated mechanisms behind it—mark price, tiered liquidation, U-based margin, and portfolio margin—were not designed on a blank slate but were forced into existence by a series of market disasters.
In August 2018, OKEx (now OKX) faced a massive long position liquidation of approximately 50,000 BTC. If liquidated at market price, it would have pierced the order book and triggered a cascade of liquidations; if not liquidated, it would undermine the system's credibility. OKEx chose the then-industry-standard "socialized clawback," distributing the loss from the liquidation shortfall to all profitable traders, sparking strong community backlash. This event directly led to three reforms: introducing position limits, establishing an insurance fund, and switching to an auto-deleveraging (ADL) system. Notably, ADL was not invented by BitMEX but was a mechanism designed by Huobi for its delivery futures between 2014 and 2015. BitMEX directly adopted and tweaked it when launching perpetual contracts in 2016.
The insurance fund, as the first line of defense against liquidation shortfalls, operates on the logic of capturing the premium between the liquidation price and the bankruptcy price. When a user's position is forcibly closed, the difference between the liquidation execution price and the bankruptcy price is injected into the fund, rather than being returned to the user or pocketed by the exchange as profit. This mechanism continuously accumulates the fund's size under normal market conditions, but during extreme market events, when liquidity dries up and the liquidation price falls below the bankruptcy price, the insurance fund acts as a buffer to absorb the shortfall.
On March 12, 2020, BitMEX faced a crisis where the order book had only $20 million in buy orders, while pending liquidation sell orders amounted to $200 million. If the network remained online, the BTC contract price would have been driven to zero by the liquidation engine itself. BitMEX ultimately chose to cut server connections, publicly claiming a DDoS attack. This event exposed the fatal flaw of coin-margined inverse contracts: during a crash, contract losses and margin depreciation resonate at the same frequency, creating a death spiral. Subsequently, the industry was forced to rewrite risk control rules, including introducing mark price, tiered liquidation, and U-based margin mechanisms, transforming perpetual contracts from a wild experimental product into a global pricing machine.