How Do Decentralized Exchanges (DEXs) Handle Collateral and Margin for Perpetual Futures Trading?
DEXs manage collateral and margin through smart contracts in a non-custodial manner. Traders deposit collateral, typically stablecoins or a supported cryptocurrency, into a smart contract vault.
The contract then manages the margin requirements, automatically calculating the Maintenance Margin and initiating liquidations if the collateral value drops below the required threshold. This process removes the need for a centralized intermediary to hold user funds, adhering to the principles of decentralized finance.
Glossar
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
Cross Margin
Leverage ⎊ Cross margin, within cryptocurrency derivatives and options trading, fundamentally involves utilizing a single margin pool to collateralize positions across multiple instruments.
Perpetual Futures
Structure ⎊ Perpetual Futures are a type of derivative contract, native to the cryptocurrency market, that allows traders to speculate on the future price of an underlying asset without a fixed expiration date.
Isolated Margin
Leverage ⎊ Isolated margin represents a risk management protocol within cryptocurrency derivatives exchanges, enabling traders to allocate specific capital for margin requirements on a per-contract basis.