What Is the Purpose of ‘Margin’ in Both Traditional and Smart Contract Derivatives?

Margin serves as a good-faith deposit to cover potential losses in a leveraged position. In both traditional and smart contract derivatives, it ensures that a counterparty has sufficient funds to cover their obligation if the market moves against them.

For smart contracts, margin is held as on-chain collateral, which is automatically liquidated if its value drops below a threshold, preventing default.