The slurry-phase hydrocracking of Karamay atmospheric residue (AR) with water-soluble dispersed catalyst was studied, and the catalyst after being separated from the reaction products was analyzed using laser Raman spectroscopy (LRS), X-ray diffraction (XRD), and X-ray photoelectron spectroscopy (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 AR 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 degrees formed on the catalyst surface. The free-radical intermediate H degrees formed on the catalyst surface could react with the free radicals of large molecules and could suppress coke deposition.