How Can an Oracle Be Used to Trigger a Margin Call in a Derivatives Contract?

An oracle continuously provides the current market price of the underlying asset to the smart contract governing the derivatives trade. If the asset's price moves unfavorably, causing the user's margin ratio to fall below a pre-defined maintenance threshold, the oracle's price update triggers the smart contract's logic.

This logic then executes a 'margin call' or, in DeFi, an automated liquidation event to prevent further losses.