Margin Risks

High leverage amplifies the impact of price volatility, increasing the likelihood of margin calls and forced liquidations.

Sudden and extreme price movements in assets can rapidly erode collateral value, especially during low-liquidity periods or market crashes.

If the protocol uses volatile assets as collateral, fluctuations in their value can increase the risk of liquidation.

Different exchanges use varying liquidation thresholds, risk engines, and margin call protocols. These inconsistencies can create additional complexity in managing margin risk.

In fast-moving markets, delays in deploying additional collateral to meet margin requirements can result in liquidation.

In periods of market stress, a lack of liquidity can result in slippage during liquidation events, magnifying realized losses.

• The protocol employs strict leverage limits for perpetual futures positions to ensure that collateral buffers are sufficient to withstand significant market volatility.
• Positions are typically over-collateralized, with a margin utilization ratio well below the maximum allowed on the exchange.

• The protocol actively monitors margin ratios across all exchanges in real-time using automated systems.
• When margin levels approach critical thresholds, additional collateral is deployed immediately to prevent liquidation.
• Automated alerts are triggered when margin utilization exceeds predefined thresholds (e.g., 50% utilization), enabling the team to act promptly.
• Collateral top-ups are automated in most cases, with manual intervention available for exceptional circumstances.

• Positions are distributed across multiple exchanges to reduce concentration risk and exposure to a single exchange's liquidation engine.
• Each exchange's margin requirements, liquidation thresholds, and risk management systems are thoroughly analyzed to ensure compatibility with the protocol's trading strategy.

• The protocol conducts regular stress tests to simulate extreme market conditions, including sudden price crashes or rapid depegging of collateral, high volatility scenarios with cascading liquidations across multiple exchanges, and periods of low liquidity where slippage is significant during forced liquidations.
• Key Metrics Tested: Margin utilization ratios, impact of price movements on collateral value and maintenance margin, and liquidity available to absorb additional collateral requirements.

• In periods of abnormal market conditions (e.g., extreme volatility or low liquidity), the protocol proactively reduces the size of its trading positions to minimize exposure.
• This includes partially closing funding arbitrage positions or adjusting hedges to reduce margin utilization.

• The protocol maintains a reserve fund that can be rapidly deployed to bolster margin positions if necessary.
• This reserve is capitalized using a portion of protocol revenues and is held in stablecoins or other equivalently liquid assets.

• The protocol operates a 24/7 trading team with global coverage, ensuring continuous monitoring of margin positions and market conditions.
• The team is supported by automated systems for margin management, with manual intervention available in the event of abnormalities.

• The protocol maintains sufficient liquidity to meet collateral requirements across all exchanges.
• A portion of assets is held in highly liquid stablecoins to ensure immediate availability for margin top-ups.