How Does the Concept of ‘Run Risk’ on a Stablecoin Relate to Margin Requirements in Derivatives Trading?
'Run risk' is the danger that a large number of stablecoin holders simultaneously attempt to redeem their tokens for the underlying asset, typically fiat, due to a loss of confidence. If the stablecoin's reserves are illiquid or insufficient, the price can collapse (depeg).
In derivatives trading, a stablecoin run directly threatens the collateral's value. Exchanges must immediately raise margin requirements or liquidate positions to compensate for the depreciating collateral, preventing the exchange from becoming insolvent.
This sudden need for more collateral can trigger cascading liquidations.
Glossar
Stablecoin Reserve Audits
Attestation ⎊ Stablecoin reserve audits fundamentally involve independent attestation of the assets backing a stablecoin’s purported value, a process critical for maintaining market confidence and systemic stability within the cryptocurrency ecosystem.
Stablecoin Run
Contagion ⎊ A stablecoin run represents a systemic risk event within cryptocurrency markets, characterized by large-scale redemptions of a stablecoin, typically triggered by a loss of confidence in its underlying reserves or peg maintenance mechanism.
Margin Calls
Trigger ⎊ Margin calls represent a demand from a brokerage or exchange for an investor to deposit additional funds or collateral to bring the account back to the required maintenance margin level, particularly relevant in leveraged cryptocurrency trading and derivatives markets.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Margin Requirements in Derivatives
Definition ⎊ Margin requirements in derivatives represent the collateral necessary to cover potential losses on leveraged positions.
Loss of Confidence
Collapse ⎊ A sudden, widespread loss of belief in the technical soundness or economic viability of a crypto asset or its underlying protocol.