Trading Guide
Trading Basics
How do perpetual futures work?
Perpetual futures are derivative contracts that track an asset's price but never expire. Unlike traditional futures, there's no settlement date. Traders can:
- Go long (bet price goes up)
- Go short (bet price goes down)
- Use leverage (1x-100x)
- Hold positions indefinitely
What leverage can I use?
LemonMarkets supports leverage from 1x to 100x, allowing you to amplify your exposure to any perpified asset. Higher leverage means higher potential profits but also higher risk of liquidation.
What is liquidation?
Liquidation occurs when your position's losses approach your margin amount. To protect the protocol and other traders, positions are automatically closed (liquidated) before losses exceed your deposited collateral.
Liquidation threshold varies by leverage:
- Higher leverage = closer to liquidation price
- Lower leverage = more room for price movement
How are perpetual futures different from spot trading?
| Spot Trading | Perpetual Futures |
|---|---|
| Own the actual asset | Synthetic exposure only |
| No leverage | 1x-100x leverage |
| No short selling | Can short any asset |
| Need to tokenize RWAs | Price feed is enough |
| Limited to crypto | Any asset with price |
Do I need to own the underlying asset?
No! That's the power of perpification. You get price exposure without owning or tokenizing the underlying asset. Our synthetic perpetuals track prices through oracle feeds.
Position Lifecycle & Mechanics
How do I start trading a new market?
Simply paste the contract address (CA) or symbol of any asset you want to trade. If the market doesn't exist yet, it will be automatically created when you open the first position. No approval needed - instant perpification!
What happens when I open a position?
When you open a position, here's the exact flow:
- Fees Deducted: Opening fees are taken from your transaction
- Margin Deposited: Your chosen margin amount is committed
- Collateral Contribution: 10% of your margin is added to the collateral pool
- Liquidity Provision: This 10% serves as liquidity for ALL traders on that market to trade against
- Position NFT Issued: You receive an NFT representing your position
- Leverage Applied: Your position gets exposure up to 100x leverage
Example:
- You deposit $1,000 margin at 10x leverage
- $100 (10%) goes to collateral/liquidity pool
- You get $10,000 exposure to the asset
- Your Position NFT tracks this entire position
What are the profit caps?
Profits are capped to ensure protocol stability:
- 5% of total market liquidity
- 10% of collateral pool
Your actual profit is limited to whichever cap is reached first. This prevents any single position from draining market liquidity.
Example:
- Market has $100,000 liquidity
- Collateral pool is $50,000
- Your max profit = min($5,000, $5,000) = $5,000
What happens when I take profits?
When you close a winning position:
- Profit Calculation: PnL calculated based on entry vs exit price
- Cap Applied: Profit capped at 5% of liquidity or 10% of collateral pool
- Closing Fee: Small fee deducted from your total
- Collateral Return: Your contributed collateral returned
- Profit Payout: You receive margin + capped profit in USDC
- Position NFT Burned: NFT destroyed as position is closed
What happens when I take losses?
When you close a losing position:
If PnL is between 0% and -10%:
- Closing fee deducted
- Collateral returned based on your pool share
- Remaining margin (minus losses) returned to you
- Position NFT burned
If PnL is below -10%:
- Closing fee deducted
- Collateral is NOT returned (absorbed by pool)
- Remaining margin (if any) returned to you
- Loss margin added to liquidity pool
- Position NFT burned
This mechanism ensures the liquidity pool grows from losses while protecting traders from total wipeout.
What happens when I'm liquidated?
Liquidation occurs automatically when your losses approach your margin threshold:
- Position Auto-Closed: System closes your position immediately
- Margin Forfeited: Your entire margin is added to the liquidity pool
- Collateral Absorbed: Your 10% collateral contribution stays in pool
- Position NFT Burned: NFT destroyed
- No Return: You receive nothing back - 100% loss
Liquidation protects the protocol and other traders from negative balance scenarios.
How are new markets created?
Markets are created permissionlessly and automatically:
- User Submits Trade: You paste a contract address or symbol
- Oracle Check: Protocol verifies reliable price feed exists
- Market Initialization: New market created instantly
- First Position Opens: Your position becomes the initial liquidity seed
- Market Live: Other traders can now trade this perpified market
No voting, no approval, no waiting. If the oracle exists, the market exists.
Position & Collateral
What collateral do I need to trade?
All positions require USDC as collateral. Simply deposit USDC, and you can trade any perpified market. No need to hold the underlying asset.
What are Position NFTs?
Every perpified position is represented as an NFT (ERC-721 token). This means:
- Transferable: Sell or transfer your position
- Composable: Use in other DeFi protocols
- Transparent: On-chain position history
- Ownership: Full control of your derivative position
Can I transfer my positions?
Yes! Position NFTs are fully transferable. You can:
- Sell open positions to other traders
- Transfer positions between wallets
- Use positions as collateral in other protocols
- Trade positions on NFT marketplaces
What is the collateral pool used for?
The collateral pool (10% of every position's margin) serves multiple purposes:
- Shared Liquidity: All traders on a market trade against this pool
- Counterparty Backing: Ensures profits can be paid out
- Loss Absorption: Absorbs losses from liquidated positions
- Market Stability: Grows over time as positions are opened and closed
- Insurance: Protects against extreme market events
Your 10% contribution benefits the entire market ecosystem.
Can I get my collateral contribution back?
It depends on your PnL when closing:
| Position PnL | Collateral Return |
|---|---|
| Profit (>0%) | ✅ Full return |
| Small loss (0% to -10%) | ✅ Partial return based on pool share |
| Large loss (<-10%) | ❌ No return - absorbed by pool |
| Liquidated | ❌ No return - absorbed by pool |
This creates a risk-reward balance where successful traders recover collateral while unsuccessful positions contribute to pool stability.
Fees & Economics
What fees do I pay?
LemonMarkets charges:
- Opening Fee: Small percentage when opening a position
- Closing Fee: Small percentage when closing a position
- Funding Rate: Periodic payment between longs and shorts (market-dependent)
Fees vary by market size, volatility, and liquidity conditions.
What are funding rates?
Funding rates balance long and short positions in perpified markets:
- If more traders are long → longs pay shorts
- If more traders are short → shorts pay longs
- Payments occur every 8 hours
- Rates adjust based on market imbalance
This mechanism keeps perpetual prices anchored to spot prices.
How does the protocol make money?
Revenue sources:
- Trading fees on all perpified markets
- Portion of liquidation penalties
- Protocol-owned liquidity returns
Revenue supports:
- Protocol development
- Oracle costs
- Insurance pool
- Governance token holders (future)
Ready to start trading? Check out the Getting Started Guide or explore Advanced Topics.