Main conclusions
When trading futures on Binance, users are faced with two different prices: the last price and the mark price.
The last price is the last trading price of the contract and the mark price is the estimated fair value of the contract.
To avoid unnecessary liquidations during periods of market volatility and prevent price manipulation, Binance Futures uses the mark price as a liquidation benchmark.
Futures contracts give users access to cryptocurrencies without having to own the underlying asset. The price of a futures contract depends on the spot price of the underlying asset. The spot price is the current market price of a cryptocurrency at which it can be bought or sold for immediate settlement.
Ideally, the futures contract price (last price) follows the spot price of the underlying asset. However, this is not always the case, as futures contracts have their own supply and demand dynamics, which often results in differences in the prices of these contracts and the underlying assets.
Therefore, when trading on Binance Futures, you may encounter two different prices: the last price and the mark price.
What is the last price
Last Price is the last traded price of the futures contract. In other words, the last trade of a particular contract determines its last price.
The value of a perpetual contract such as BTCBUSD is based on the underlying asset, which in this case is Bitcoin. These contracts have their own supply and demand quantities as traders constantly buy and sell them on Binance Futures. As a result, the BTCBUSD contract may receive a unique value that will be different from the BTC spot price.
Thus, the last price of a futures contract may gradually deviate from the actual price of the underlying asset traded on the spot market. The greater the trading volume in the futures market, the greater the price divergence.
To create a more stable and reliable pricing structure for perpetual futures contracts, Binance Futures relies on mark price.
What is the marking price
The mark price is the estimated true value of the contract. It is also known as mark-to-market and takes into account the fair value of an asset, thereby preventing unnecessary liquidation during periods of market fluctuations. In Binance Futures, the mark price is used to trigger the position liquidation process.
On Binance Futures, a contract's mark price is calculated as the average of its last price and the spot price of the underlying asset to avoid price manipulation by a single order book or exchange. This allows you to balance and smooth out abnormal price fluctuations during periods of high volatility.
The mark price is used as a guideline for:
1. Liquidation of positions
Liquidation occurs when the mark price reaches the liquidation price of the position. Using a mark price protects users from unfair liquidation that can occur due to short-term fluctuations in the last price while the spot price has not actually reached the liquidation level.
2. Unrealized PnL
The mark price is used as a guideline for calculating the unrealized PnL as it may be difficult to know the actual realized profit until the position is closed. This also ensures that unrealized PnL is calculated accurately to avoid unnecessary liquidations.
If you would like to better understand the technical aspects of mark price, please refer to the following articles: USDⓈ-Margined Quarterly Futures Mark Price, Mark Price and Coin-Margined Index Price.
Latest price and marking price
Let's use the following analogy to make it easier to understand the difference between the last price and the mark price: the mark price is like the average price of gasoline in the entire country, and the last price is the price per liter of gasoline that you pay at a specific gas station near your home.
The mark price is not used in real trading and can be considered as an indicator that tracks the risk of a position, while the last price is the main market price at which users trade.
To switch from last price to mark price and vice versa in the Binance mobile app, follow the steps in the image below.
To switch from last price to marked price and vice versa in your computer browser, follow the steps in the image below.
Conclusion
On Binance Futures, the liquidation price of a contract is always the mark price as it represents a more reliable and stable measure of value. It is important to note that the mark price is only an average price and not the actual price at which the futures market is traded.
For more information, check out the following articles:
(Blog) Cryptocurrency futures: what you need to know when starting to trade
(Blog) Crypto Futures Basics: What is Liquidation and How to Avoid It
(Support) Binance Futures FAQ
