How Does the Lack of Finality Affect the Collateralization Ratio in a Derivatives Protocol?

The lack of finality increases the risk of collateral being double-spent or reversed, which necessitates a higher collateralization ratio. Derivatives protocols must over-collateralize their positions to absorb the potential loss from a security event.

Higher ratios mean less capital efficiency for traders. Conversely, strong finality allows protocols to safely lower their collateral requirements, increasing capital efficiency.