What Is “Pre-Funded Variation Margin” in the Context of Smart Derivatives?

Pre-funded variation margin refers to the capital that parties must deposit into the smart contract before trading begins to cover potential mark-to-market losses. Unlike traditional finance where margin is exchanged daily, smart contracts lock this margin upfront or automatically adjust it.

This margin is used to settle the daily changes in the derivative's value, ensuring continuous solvency. By pre-funding, the contract ensures there is always enough capital on-chain to cover the current obligation, drastically reducing settlement risk.