How Is Leverage Managed in Decentralized Perpetual Swap Protocols?
Leverage is managed through collateral and liquidation mechanisms enforced by smart contracts. Users deposit collateral, and the protocol calculates their maximum allowed leverage based on the collateral value and the initial margin requirement.
If the collateral value drops below the maintenance margin level due to adverse price movement, the smart contract automatically liquidates the position to prevent the protocol from incurring bad debt.
Glossar
Decentralized Perpetual Swap
Architecture ⎊ A decentralized perpetual swap (DPS) represents a sophisticated evolution within cryptocurrency derivatives, leveraging blockchain technology to facilitate continuous, margin-based contracts without fixed expiration dates.
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.
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.
Decentralized Protocols
Architecture ⎊ Decentralized protocols, within cryptocurrency, options trading, and financial derivatives, represent a fundamental shift from centralized intermediaries to peer-to-peer systems governed by code.