Contract Algorithm Scythe: The Battle of Financial Philosophies of Perpetual Futures between Binance and OKX

Author: danny

If you often wonder why your positions on OKX get liquidated before those on Binance? Or why you earn less on Binance compared to OKX? Or why OKX has been slow to introduce new contract trading pairs, are they giving up? This long article will address your confusion.

Revealed: Why OKX has hardly launched new perpetual contract trades? In contrast, Binance's new contract trades are skyrocketing? - Is it a business decision? Compliance? No, this is actually a battle of underlying algorithms.

Introduction

I wonder if anyone has noticed the same perpetual contract trading pair.

Why can Binance's leverage go up to 75x (of course, assuming you can open at 75x, the maximum can only go up to 5000u), while OKX can only offer up to 20x.

Is it true that the prices for the same trading pair at the same point in time are different between two exchanges? And are the funding fee rates different as well?

Is it because you are terrifyingly strong that capital specifically sets up schemes against you? OKX is specifically targeting your account, launching pinpoint strikes at your account; Binance is watching your account and cutting into your profits?

Don't be silly, kid. You're overthinking it... It's all because of the different underlying algorithms.

1. What is perpetual contract trading?

We first need to understand the key factors that determine perpetual contract trading:

1. Index Price

2. Marked Price

3. Funding Rate Algorithm

In summary, the relationship between these three key elements is as follows:

Mark price + Index price = The core algorithm mechanism that determines the "contract price"; the funding rate algorithm = The mechanism that determines whether you should pay someone and how much you should pay.

As for the differences in the algorithms of these three elements between Binance and OKX, allow me to elaborate.

What?! You said you don't want to know the details? Just passing by to see the conclusion.

Alright, let's take a look at this simple comparison table.

Summary:

OKX has algorithmically determined (mark price + buy 1 sell 1) that its contract trading has higher volatility compared to Binance, and with a coarser granularity, this further exacerbates its volatility.

2. The devil is in the details.

Below are the details of the non-(hard) chat (core) explanation. If you find it boring, you can go directly to the next chapter:

Index Price

The index price refers to the weighted average price of the spot circulating in the current market, usually derived from the spot prices of multiple mainstream exchanges, calculated after weighting.

To prevent a particular exchange from deviating too much in price due to technical or liquidity issues, the system will perform a "smoothing process":.

Binance: ±2%

OKX: ±5%

Therefore, during extreme market conditions, the index price fluctuations of OKX are greater than those of Binance, resulting in higher risk/reward and faster market response.

Mark Price

This is the most critical price in futures trading - it directly determines whether you will be liquidated.

The design concept of the mark price is to add some reference factors of contract prices based on the spot index price, forming a more "reasonable" midpoint price used to calculate profits and losses and liquidation.

The formula is:

Mark Price = Index Price + Basis

The so-called "basis" refers to the price difference between spot and futures, smoothed using a moving average to prevent interference from "spike" market conditions.

In other words, the fluctuations in spot prices are the main culprit for your liquidation, rather than the mysterious "exchange secretly changing prices."

The difference in the marking price algorithm between OKX and Binance.

OKX's algorithm:

Only take the "Buy 1" and "Sell 1" from the contract, which is the mid-market price (Taker price). Do not look at the depth of the order book; the fluctuations are larger (prone to spikes), but the prices are closer to the market. This means that when there is a discrepancy between the futures and spot prices, the reversion will be faster, but you are also more likely to get liquidated or make a big profit.

Under OKX's plan, the Mark Price is more closely aligned with the spot price, and when there is a price difference between the futures and spot prices, it will revert more quickly.

Binance's algorithm:

Be more cautious. It calculates three prices:

The weighted price strongly correlated with the spot index and funding rate (considering order book depth)

OKX style buy 1/sell 1 midpoint

Actual transaction price of the contract

Then take the median value of the three as the mark price. The volatility is lower, the stability is stronger, but the speed of convergence between futures and spot is slower.

Why can the spot and contract transaction prices be different?

This is the norm for contract trading. Algorithms do not force the two to converge. Therefore, the platform has introduced a mechanism to "compensate" for this price difference: the Funding Rate.

Arbitrageurs use "forward/reverse positions" to balance the prices, but this mechanism actually has a bug, which we will discuss later.

How is the Funding Rate settled?

The positive and negative values of the funding rate are merely the results of market behavior. Its function is to gradually bring the contract price back to the spot price by transferring costs.

The positions you hold will incur funding fees at regular intervals. For example:

You opened a 10x long position with 100U (notional position 1000U)

The current funding rate is 0.1%.

You will be charged in this period: 1000 * 0.1% = 1U

Normal Rate: Long Position → Pay to Short Position

Negative Fee Rate: Short Position → Pay to Long Position

OKX's funding rate algorithm:

The general idea of the formula is:

(Contract market price - Spot index price) / Spot index price, then take the moving average and restrict the upper and lower limits (±1.5%) through Clamp.

Moreover, OKX's lending rate is set to 0. This means that the market hardly considers the actual cost of borrowing tokens.

Binance's funding rate algorithm:

In contrast, Binance is more complex, building on OKX's algorithm, which limits the upper and lower limits (±2%), and also takes into account two key factors:

① Lending rate ≠ 0

The default borrowing rate on Binance is 0.01%, so even if the spot and futures prices are the same, there will still be a minimum funding fee of 0.01%.

(2) Premium Index + Impact Bid/Ask

This part is the highlight. Binance is not satisfied with the "surface price" of buying 1 and selling 1, but rather refers to the depth of the entire order book. However, the name has been changed to the concept of "impacting buyer/seller bids."

For example:

"Impacting the seller's bid": When someone places a market order to buy $1 million, where will the price be hit?

"Impact on the buyer's bid": Conversely, how low will the price be pressed when selling?

These deep considerations make Binance's funding rates more reflective of real supply and demand, rather than just focusing on surface prices.

Precision Design

OKX Precision: 0.0001 → Minimum order unit is larger → Plus OKX is buy 1/sell 1, fast fluctuations

Binance Precision: 0.000001 → View order book depth, price changes are more refined

Combining OKX's mechanism of only referencing buy 1 and sell 1 leads to: fast fluctuations, severe liquidations, and rapid rhythms, which are suitable for short-term quick traders; while Binance is as stable as an old hen, suitable for large funds and large positions for steady operations.

A real-world example of a bug where the funding rate is "useless":

When the contract price < spot price (negative funding rate), theoretically arbitrageurs should:

Shorting spot + going long on contracts → Raising contract prices

But the problem arises: if the spot tokens are controlled by the manipulators and cannot be borrowed, arbitrageurs have no way to complete this set of operations. Even if they are willing to borrow, the borrowing rate may be higher than the funding rate, rendering the arbitrage opportunity invalid.

As a result, the contract price remains consistently below the spot price, and the funding rate continues to settle, allowing the "long positions to get money for free," but the price cannot recover.

This is also why Alpaca/TRB and other "meme coins" can have such outrageous operations. Even though Binance has repeatedly adjusted the funding fee frequency and the funding rate, it still cannot "dissuade" the restless hearts of the retail investors.

Interesting exchange "Conscience Behavior":

It is said that some "slightly principled" exchanges, in order to smooth out prices, will "print" a bit of currency themselves, sell it on the spot market, and simultaneously go long on contracts to perform hedging operations.

Why is it called a conscience? Because it could have directly printed money to crash the market for arbitrage, but it chose to stabilize the market – this is already quite Zen in capitalism. However, after a bug occurred, it was attacked by the community.

Smart you, seeing this, should have realized several key facts:

Mark Price determines the profit and loss status of your account.

The funding rate mechanism is the bridge for price transmission between contracts and spot.

The algorithm design of different exchanges affects the liquidation rhythm, capital flow, and even trading strategies.

Sometimes, the contract price can't come back, not because the arbitrageurs didn't see the opportunity, but because they have no money, no coins, and can't borrow.

3. Above algorithms, beneath humanity - Different trading methods and offensive strategies

Due to the different algorithms, two different "trading techniques" and coin listing strategies have emerged (the premise is that the control of spot trading is mastered).

Trading on OKX:

Easier to spike: Due to OKX's mark price algorithm only referencing the buy 1/sell 1, and with a coarser price precision, a slightly larger Taker order can cause significant price fluctuations, making it very convenient to create a "spike liquidation."

Higher volatility, lower cost for pump/dump: You can influence market trends with less capital while triggering counterparties' liquidation faster.

Suitable for market control, quick entry and exit: more suitable for short-term washing, quickly bouncing back after hitting user stop-loss positions.

More aggressive arbitrage: Due to the fast speed of price reversion, it is possible to frequently construct operations such as spot-futures arbitrage and long-short hedging.

Trading on Binance:

More difficult to drive price fluctuations: Due to referencing the depth of the entire order book, to 'pin' it requires consuming more limit orders, resulting in higher trading costs. At the same time, because of this characteristic of the order book's thickness, we can glimpse whether there is a presence of a 'whale' through the depth of the order book.

Suitable for slow layout and stable position control: conservative big players may prefer this "hen-type market" - not easily blowing up positions, but more capable of steadily pushing prices up/down.

Arbitrage opportunities are harder to trigger: but once they appear, their persistence is stronger. For example, the funding rate event of short squeezes has also led Binance to frequently adjust the settlement frequency of funding rates.

If this is "Honor of Kings":

OKX is more suitable for assassins like Han Xin, playing liquidation games and oscillating washes; high mobility + jungle penetration + extreme escape;

Suitable for "quick knife" type traders who like to strike frequently in market fluctuations and fight against volatility.

Binance is more suitable for strategists like Zhuge Liang, who excel at trend control, capital management, and institutional arbitrage; calm calculation, kite strategy, and passive trigger harvesting.

Binance's algorithm emphasizes the balance of order book depth, impact price, and funding cost, much like Zhuge Liang used wisdom and strategy to maneuver, exhausting opponents with kite tactics (funding rates) — stabilizing control and prioritizing the overall situation (this is also why most funding rate consumption battles occur on Binance).

Does the algorithm affect the exchange's decision to list new perpetual coins?

The answer is affirmative, and the impact is significant, especially against the backdrop of severe overall market liquidity shortage, where new coins face immediate pressure. How exchanges manage price fluctuations and control liquidation risks has almost become a "line of life and death" for the possibility of listing perpetual contracts.

From the perspective of mechanism design, Binance is more suitable for launching perpetual contract trading for new coins. Firstly, its relatively smooth pricing mechanism constructs the mark price by taking the median of the spot index, order book depth, and transaction price. This way, even if liquidity fluctuates sharply in the early stages of a new coin's launch, it is relatively less likely to experience extreme "pump and dump" scenarios, avoiding the risk of liquidation, which in turn prevents the exchange from incurring losses.

Secondly, its depth-driven funding rate algorithm no longer solely relies on the bid and ask prices in the order book, but instead simulates large Taker order behaviors to calculate the "impact buy/sell price" and construct a more realistic basis. This mechanism effectively reduces the extreme profits/losses caused by liquidation, allowing market makers and project parties to enter the market with confidence to stabilize prices.

In contrast, the risk of OKX when launching perpetual contracts for new coins is significantly higher, as its algorithm results in coarser price granularity and more violent fluctuations. Additionally, the funding rate only considers the market price, without constraints from borrowing interest rates, akin to throwing a new coin directly into a sensitive and high-pressure liquidation trigger.

Under the condition of insufficient liquidity, any sharp buying or selling can cause price spikes, triggering widespread liquidations; after a liquidation, if there is significant slippage and insufficient counterparties, it can easily lead to a breach of margin, ultimately resulting in losses for the exchange itself. The launch of $OM is a very typical example - high volatility, price spikes, margin breaches, and ultimately the exchange "harms others without benefiting itself."

Therefore, in terms of algorithmic philosophy, Binance's robust mechanism makes it more suitable for following the "large market capitalization trend + institutional arbitrage" route, and it is also easier to establish commercial connections with project parties/market makers; while OKX's high volatility mechanism, although more attractive to aggressive traders, may backfire if liquidity preparations are not well made when new coins are launched.

This is not simply a difference in business strategies, but rather an inevitable result determined by underlying design philosophy.

5. Different underlying algorithms reflect different financial philosophies.

You can view this algorithmic game as a competition between two worldviews: one world promotes systematism, smoothness, and stability - that is Binance; the other world believes in the invisible hand, volatility, and the extreme games of human nature - that is OKX. The platform you choose not only determines your trading strategy but also implies your faith in this financial world.

OKX: Behavioral Finance School + Market Structuralism What OKX embodies is a trading perspective that is more aligned with the "philosophy of volatility." Its core logic is: the market is not rational; it is a stage driven by human nature and the game of manipulation.

Algorithmically, OKX uses the best bid and best ask as the core calculation source for the mark price. Coupled with coarser price precision and a more direct response to the order book, this makes the price more likely to "jump" and quickly trigger liquidation or large profits. This mechanism is almost a laboratory model of behavioral finance: prices are driven by emotions, and irrational decisions and herd behavior lead to excessive market reactions.

On OKX, strategy formulation is not based on the assumption of long-term equilibrium but rather on the "temporary imbalance of market structure." It encourages, and even tacitly allows, traders to exploit market microstructures (such as slippage, low liquidity, order book hanging, etc.) to reap profits—this is precisely the core of the "structuralist trading philosophy," which aims to create volatility by designing structural instability, thereby capturing excess returns.

It attracts traders who are skilled in rhythmic fighting and daring in their gambling—they do not need market stability; what they need is "intense volatility."

Binance: The Efficient Market Hypothesis + Quantitative Finance School. In stark contrast to this is another financial philosophy represented by Binance: while the market may be irrational in the short term, it will ultimately return to equilibrium in the long term; the mission of mechanism design is to push the market towards stability and rationality.

In Binance's system, the mark price is constituted by the median of the spot index, order book price, and transaction price, while the funding rate also takes into account borrowing costs and impact price. This design essentially constructs a systematic arbitrage equilibrium mechanism, allowing for each deviation in price to be gradually pulled back through rational arbitrage paths—this completely aligns with the belief of the "Efficient Market Hypothesis (EMH)": prices reflect all available information, and excess returns can only come from taking on greater risk or systematic arbitrage.

Binance's logic is "market control." They rely on a low volatility, high trust, and cost-transparent trading environment. This concept extends to the quantitative finance school and system trading theory: using mathematical models to navigate the market, employing portfolio strategies to hedge risks, and finding probabilistic advantages within certainty.

It's not about fighting in the fluctuations, but about gradually incorporating the market into your logic using arbitrage formulas.

OKX is human-oriented, believing that the market is irrational, and "emotion, volatility, and trading" are the eternal protagonists; Binance is structure-oriented, believing that the market can be modeled, anticipated, and managed, with volatility being a deviation rather than a fate. This is not only a confrontation between two product logics but also an eternal debate between behavioral finance and quantitative finance, chaotic markets and rational markets.

Written at the end

Behind this seemingly cold algorithmic competition lies a reflection of two fundamental understandings of the "market," this fictitious entity: is it viewed as a battlefield full of human emotions, desires, and games running rampant; or is it seen as an order that can be tamed by rationality, models, and systems?

OKX and Binance are like two philosophers, respectively interpreting Heraclitus's "everything flows" and Plato's "rational order"; one fighting in chaos, the other strategizing within a framework. Traders immersing themselves are not just betting on prices, but choosing systems. Perhaps, true trading is not only about understanding algorithms, but also about insight and mastery over the tension between human nature and order.

The market never sleeps, and the philosophy of the market never stops.

May you and I always maintain a sense of reverence for the market.