How Does the Concept of ‘Margin’ Apply When Using Stablecoins for Options?
Margin is the collateral deposited by a trader to cover potential losses in a derivatives position. When stablecoins are used, they serve as the margin, ensuring the broker or smart contract has sufficient funds to cover potential negative price movements.
Since stablecoins are non-volatile, the required margin is less prone to fluctuation than if a volatile cryptocurrency were used, simplifying risk management.
Glossar
Cryptocurrency
Architecture ⎊ Cryptocurrency, within the context of derivatives and trading, represents a decentralized ledger technology fundamentally altering asset representation and transfer mechanisms.
Collateral
Asset ⎊ Collateral, within the domain of crypto derivatives and decentralized finance, refers to the digital asset or assets pledged by a market participant to secure a loan or to cover potential losses on a leveraged trading position.
Derivatives
Instrument ⎊ Derivatives are financial instruments whose value is intrinsically linked to, or "derived" from, an underlying asset, benchmark, or rate.
Stablecoins
Peg ⎊ Stablecoins represent a class of cryptocurrencies engineered to maintain a stable value relative to a specified asset, typically a fiat currency like the US dollar.