This section explains how equilibrium calculates margin for user accounts when they borrow and trade on the DEX
In Equilibrium both borrower and bailsman sub-accounts may hold multiple assets and liabilities (debts) and thus are subject to collateralization requirements (margin levels). At any point in time user account's current margin is calculated the following way:
, expressed in %
These levels apply both to borrower and bailsman sub-accounts, and work both for money market and the DEX. When trading on the DEX, active user orders in the order book also affect margin requirements as explained in detail here.
If current margin < initial margin, users may not borrow more
If current margin falls below maintenance margin, a user has 24 hours to top up their accounts' current margin to initial margin level or higher. Otherwise user will default and his portfolio will be liquidated.
If current margin falls below critical margin level, system liquidates user's portfolio and distributes his assets and debts to the bailsman pool. There is an implicit penalty of 5% for liquidation.
Both limit and market orders are subject to margin requirements when trading on Equilibrium DEX. When users place orders system checks their account margin and compare it to the initial margin level from the table above. Users can’t place orders which bring their account margin below the initial margin requirement.
The margining system can handle different scenarios where users sell an asset they own (no margin required vs. short selling) or buy an asset with EQD stable coins they physically possess (no margin required vs leveraged long).
One of the most important features that distinguishes Equilibrium from traditional money markets and classical stablecoin protocols like is the fact that instead of using single collateral positions, Genshiro allows users to work with portfolios. There are obvious benefits to such approach:
- A well diversified portfolio of assets may reduce risks associated with user's portfolio and lead to reduction in interest fees.
- Diversification in turn allows to significantly reduce margin requirements and allow for competitive leverage which is much higher than theoretical limit of 2x (given typical 150%+ collateralization requirements).
- Flexibility and the absence of the need to keep multiple "collateralised debt positions" in different assets.
Even though Equilibrium’s unique approach allows to diversify this risk away by using collateral portfolios, we can never be sure that there won’t be any malicious actors who will use the system to opt out of their token allocations even with a penalty - a good alternative to selling tokens on a thin market.
A good initial measure which mitigates risk outlined above is a system of discounts for collateral tokens which addresses the nature and relative magnitude of risks each asset bears. Generally speaking, price predictability and lower associated risks result in lower discounts (higher coefficients when calculating collateral value), as bailsmen have a high degree of certainty that the full amount of the loan can be covered if the collateral must be liquidated.
Discounts affect portfolio margin! Be careful when buying assets with high discount on the DEX, as buying it with borrowed funds will decrease you portfolio margin.
The following table shows discounts Equilibrium will set initially on some of the supported assets.
Last modified 8mo ago