The slurry-bed hydrocracking of Karamay VGO with water-soluble dispersed catalyst was studied and the catalyst after being separated from the reaction products was analyzed by using LRS, XRD and XPS to identify the crystal structure of the catalyst. In this paper, the catalytic functions of molybdenum, nickel and iron were studied respectively during the slurry-phase hydrocracking while using diphenylmethane as the model compound and VGO from Karamay crude as the feedstock. The test results showed that, during the slurry-phase hydrocracking of heavy oil, the metal sulfides entered into chemical reactions with the free radical intermediate H· formed on the catalyst surface. The free-radical intermediate H· formed on the catalyst surface could react with the free-radicals of big molecules and could suppress coke deposition.