1. U Standard Contract Overview

1.1 Definition and Basic Principles

U perpetual contract belongs to the category of derivative trading. The two parties agree in advance to buy or sell a certain amount of cryptocurrency at a predetermined price at a specific time in the future, and the value and profit or loss of the contract are calculated and settled in stablecoin USDT. For example, if there is a Bitcoin U perpetual contract, investors can use USDT to buy or sell Bitcoin contracts, and the final profit or loss is presented in the quantity of USDT.

1.2 Comparison with Coin-margined Contracts

Pricing and settlement currency: Coin-margined contracts use the corresponding cryptocurrency itself as the pricing and settlement currency. For example, Bitcoin contracts are settled in Bitcoin. In contrast, USDT is uniformly adopted as the pricing and settlement currency for USDT-margined contracts. This feature makes USDT-margined contracts more intuitive in value measurement and effectively avoids the interference of large fluctuations in cryptocurrency prices on contract value evaluation.

Risk characteristics: During the holding process, the coin-based contract not only faces the risk of price fluctuations of the contract underlying cryptocurrency, but also bears the price risk of holding the settlement currency (cryptocurrency). In contrast, the U-based contract settles with stablecoins, so investors only need to focus on the price changes between the contract underlying cryptocurrency and USDT, thereby reducing the additional risk caused by the price fluctuations of the settlement currency.

2. U underlying contract trading mechanism

2.1 Margin System

Margin types: U-based contract trading generally uses two types of margin, initial margin and maintenance margin. Initial margin is a certain proportion of funds that investors must deposit when opening a position, to ensure the smooth performance of the contract. Maintenance margin is the minimum margin level that investors must maintain when the contract value changes unfavorably.

Margin calculation method: Taking a certain Bitcoin U perpetual contract as an example, assuming the contract multiplier is 0.001 (i.e. each contract represents 0.001 Bitcoin), the current price of Bitcoin is 50000 USDT, and the leverage is 10 times. If an investor opens a long position and buys 100 contracts, then the contract value is 50000 USDT × 0.001 × 100 = 5000 USDT. Under 10 times leverage, assuming the initial margin ratio is 10%, the initial margin that the investor needs to pay is 5000 USDT × 10% = 500 USDT.

2.2 Leverage Mechanism

Leverage selection: U-based contract platforms usually provide investors with a range of leverage options to choose from, commonly ranging from 1 to 100 times. While high leverage can amplify investor profits, it also multiplies risks. For example, in the aforementioned Bitcoin contract, if the Bitcoin price rises by 10%, under 10x leverage, the investor’s profit will reach 100% of the initial margin (excluding fees and other factors); however, if the price falls by 10%, the investor will face the risk of losing all of the initial margin.

Principle of leverage: The leverage mechanism allows investors to control contracts of greater value with less capital, thereby improving the efficiency of capital utilization, enhancing market liquidity, and increasing trading activity. However, when using leverage, investors must carefully assess their risk tolerance to avoid significant losses due to excessive use of leverage.

2.3 Delivery and Liquidation Mechanism

Delivery Methods: The U-contract is divided into delivery contracts and perpetual contracts. Delivery contracts have a fixed delivery date, and at expiration, regardless of the investor’s profit or loss situation, the contract will be settled based on the agreed delivery price and completed the final fund settlement in USDT. Perpetual contracts, on the other hand, do not have a fixed delivery date. They use a funding fee mechanism to anchor the contract price to the spot price to maintain market balance.

Closing Position: Investors can choose to close their positions before the contract expires by buying or selling the same number of contracts in the opposite direction, thus ending their current position. When closing a position, the system will calculate the investor’s profit or loss based on the opening and closing prices, and transfer the profit or loss to the investor’s account in the form of USDT.

3. Advantages of U-based contracts

3.1 Price Stability and Risk Control

Due to stablecoin USDT as the pricing and settlement currency, U-based contracts can to some extent resist the impact of extreme cryptocurrency price fluctuations on the trading value. Investors do not need to worry about a significant drop in the price of the settlement currency itself, thus being able to more accurately assess and control investment risks. For example, when the overall cryptocurrency market experiences a crash, holding coin-based contracts may expose investors to double losses due to the devaluation of the settlement currency (cryptocurrency); whereas U-based contract investors only need to pay attention to the price relationship between the contract target and USDT, making the risks relatively more concentrated and controllable.

3.2 Trading Flexibility and Market Liquidity

U perpetual contract provides a wide range of leverage options, allowing investors to flexibly adjust the efficiency of capital utilization based on their risk preferences and investment strategies. At the same time, this flexibility attracts a large number of investors to participate in trading, greatly increasing market liquidity. In a highly liquid market environment, investors can buy and sell contracts more conveniently, reduce slippage costs, and improve trading execution efficiency.

3.3 Easy Asset Allocation and Risk Management

For investors building diversified investment portfolios, U-based contracts provide a complementary tool for traditional financial assets and other cryptocurrency investments. By properly allocating U-based contracts, investors can flexibly adjust the risk-return characteristics of their portfolios in different market environments and achieve effective risk management of their assets. For example, when the cryptocurrency market is expected to enter a bull market, investors can appropriately increase the proportion of U-based contract holdings to obtain higher returns; when market uncertainty increases, they can reduce contract leverage or decrease positions to protect asset safety.

4. Risks of U-based Contracts

4.1 Market Risk

Price volatility risk: Although the U-based contracts are priced in stablecoins, the sharp fluctuations in the prices of the underlying cryptocurrencies remain a major source of risk. The cryptocurrency market is influenced by various factors such as macroeconomic conditions, policies and regulations, and market sentiment, and prices may experience significant ups and downs in a short period of time. If investors make wrong judgments, they may face huge losses. For example, in May 2021, the price of Bitcoin plummeted from about 58,000 USDT to below 30,000 USDT within a week. Investors holding long positions in Bitcoin-based contracts would suffer heavy losses if they fail to stop loss in time.

Interconnected Risks: There is a certain correlation between different cryptocurrencies in the cryptocurrency market. When there is systematic risk in the market, the prices of different cryptocurrencies may fall simultaneously. Even if investors diversify their investments in U-based contracts for multiple cryptocurrencies, it is difficult to completely avoid the risks caused by a overall market decline.

4.2 Leverage Risk

Liquidation Risk: High leverage is one of the significant features of U perpetual contracts, but it also brings the risk of liquidation. When the contract price moves in an unfavorable direction for investors and the losses reach a certain level, causing the margin in the investor’s account to fall below the maintenance margin level, the platform will implement forced liquidation, also known as liquidation. Liquidation not only causes investors to lose all or most of their initial margin but may also result in additional debt for investors due to insufficient market liquidity at the time of liquidation.

Additional margin risk: When the contract price changes unfavorably but has not reached the liquidation condition, investors may need to add margin as required by the platform to maintain their positions. If investors fail to add margin in a timely manner, the platform may force liquidate part or all of their positions, which will also result in losses to the investors.

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Conclusion

As an important trading tool in the cryptocurrency market, U Perpetual Contract provides investors with a unique advantage in investment and risk management. Its features of pricing and settlement in stablecoins to some extent reduce trading risks and enhance trading flexibility and market liquidity. However, the U Perpetual Contract market also faces many challenges such as market risks, leverage risks, platform risks, and policy risks. When participating in U Perpetual Contract trading, investors should fully understand its trading mechanism and risk characteristics, carefully evaluate their own risk tolerance, formulate reasonable investment strategies, and choose compliant and reliable trading platforms.

Disclaimer

This content is for reference only and does not constitute investment advice. Contract trading carries high risks and may result in capital loss. Please participate with caution according to your risk tolerance. Trading is risky, and investment should be cautious.