How Do AMMs Handle Collateral and Margin Requirements for Leveraged Derivatives?
AMMs for leveraged derivatives typically use smart contracts to manage collateral and margin. Collateral is deposited on-chain, and the smart contract automatically calculates margin requirements based on the contract's parameters and the user's position.
Liquidation is also automated via the contract when the margin falls below the maintenance level, ensuring a trustless and transparent process.
Glossar
Collateral and Margin Requirements
Collateral ⎊ Collateral represents the asset or pool of assets pledged by a trader to secure a derivatives position, acting as a financial guarantee against potential losses.
Amms
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEx) design, moving away from traditional order book models to a constant function market mechanism.
Leveraged Derivatives
Mechanics ⎊ Leveraged derivatives in cryptocurrency and traditional finance amplify potential returns, and correspondingly, potential losses, through the use of borrowed capital or contractual obligations exceeding the initial investment.
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.