How Is Margin Managed in a Smart Contract-Based Derivatives Platform?
Margin is managed by the smart contract itself, which holds the collateral (usually cryptocurrency) in escrow. When a trader opens a position, the required initial margin is locked in the contract.
The contract constantly monitors the position's margin ratio against the maintenance margin requirement using real-time oracle price feeds. If the margin ratio falls below the maintenance level, the contract automatically triggers a liquidation process, selling the collateral to cover the loss.
Glossar
Smart Contract Based Assets
Programmability ⎊ Smart contract based assets are digital tokens whose core functionality, rights, and transfer logic are directly encoded and automatically executed by self-executing code on a blockchain.
Automated Liquidation
Liquidation ⎊ Automated liquidation protocols, increasingly prevalent in cryptocurrency derivatives and options trading, represent a pre-programmed response to adverse price movements designed to mitigate counterparty risk and safeguard collateral.
Passively Managed Funds
Strategy ⎊ Passively Managed Funds in the crypto space aim to replicate the performance of a specific index, benchmark, or predefined basket of digital assets or derivatives without active trading decisions from fund managers.
Smart Contract Based Trading
Execution ⎊ Smart contract based trading represents a paradigm shift in financial markets, automating trade settlement and reducing counterparty risk through deterministic code execution on a blockchain.
Automated Contract Operations
Automation ⎊ This refers to the programmatic execution of contract clauses, removing manual intervention from processes like margin calls or option exercise.
Derivatives Platform Integration
Interface ⎊ Seamless connectivity between proprietary risk engines and external derivatives exchanges is achieved through standardized Application Programming Interfaces.
Derivatives Platform Risks
Exposure ⎊ Derivatives platform risks encompass the multi-faceted financial and operational threats inherent in centralized or decentralized exchanges offering crypto futures, options, and perpetual swaps.
Oracle Price Feeds
Attestation ⎊ Oracle price feeds represent a critical infrastructural component within decentralized finance, functioning as bridges between on-chain smart contracts and external, real-world data sources.
Perpetual Contracts
Mechanism ⎊ Perpetual contracts, fundamentally, represent agreements to buy or sell an asset at a specified future date, differing from traditional futures through the absence of an expiration date; this continuous settlement is achieved via a funding rate, exchanged between long and short positions to anchor the contract price to the underlying spot market.
Derivatives Platform Risk
Platform ⎊ Derivatives platform risk encompasses the potential for financial loss or operational disruption stemming from the infrastructure and governance of a specific trading venue.