How Does the Calculation of Margin Requirements Work On-Chain?
The calculation of margin requirements is performed by the smart contract's internal logic, using real-time price data from an oracle. The contract uses a predefined formula that considers the derivative's notional value, the volatility of the underlying asset, and the chosen collateral's liquidation penalty.
This calculation is executed programmatically and transparently on the blockchain, ensuring all parties can verify the requirement without relying on a centralized clearing house's opaque calculations.
Glossar
On-Chain Calculation
Computation ⎊ On-Chain Calculation refers to the execution of complex financial and risk management algorithms directly within the deterministic environment of a blockchain's smart contract layer.
Margin Requirements
Collateral ⎊ Margin requirements represent the equity a trader must deposit with a broker or exchange as a good faith measure, securing potential losses arising from leveraged positions within cryptocurrency, options, and derivative markets.
Real-Time Price Data
Volatility ⎊ Real-Time Price Data within cryptocurrency, options, and derivatives markets represents a continuous stream of current market valuations, crucial for dynamic risk assessment and hedging strategies.