🔄Collateral & Margining

Collateral

USDC Deposits

Users need to deposit USDC as collateral before initiating trades. This collateral ensures that traders have sufficient funds to cover potential losses.

Similarly, solvers also deposit equivalent USDC as collateral into the bilateral trade agreements entered between trader and solver. This makes the agreements perfectly symmetrical. All trades are settled in USDC.

Credit Valuation Adjustment (CVA)

CVA is a penalty applied to either the trader or solver upon liquidation. This penalty is paid to the non-liquidated party and acts an incentive to always balance one's positions as well as provides a form of liquidation insurance.

Cross-Margin

By default Vibe Trading leverages a cross-margin account system.

Cross-margin is where your entire portfolio (including your USDC account balance + open trades) acts as collateral for multiple positions.

Advantages & Risks of Cross-Margin Accounts

Advantages:

1. Capital Efficiency: By allowing your entire portfolio to serve as collateral, you can open more positions with less capital upfront, enhancing your trading flexibility.

2. Risk Offset: Profits from one position can offset losses in another, potentially reducing the likelihood of liquidation.

Risks:

Total Account Liquidation: If your account's equity balance drops below the maintenance margin, Vibe Trading will liquidate ALL positions in the account, not just the losing ones. This can result in a total loss of the positions you hold.

Cross-Margin Example

Now, suppose you’ve got the same $20K USDC and decide to diversify with a $50K BTC position and a $30K ETH position. With cross-margin, your entire $20K supports both positions. If BTC dips but ETH rises, the gains from ETH help smooth out the turbulence in BTC.

Isolated Margin

Vibe Trading will introduce Isolated margin accounts in future versions.

However, there is a work-around. To isolate margin currently, traders can create separate sub-accounts and trade single positions.

Please note that you cannot transfer collateral between these sub-accounts.

Isolated-Margin Example

Now, suppose you’ve got the same $20K USDC and decide to diversify with a $50K BTC position and a $30K ETH position. With cross-margin, your entire $20K supports both positions. If BTC dips but ETH rises, the gains from ETH help smooth out the turbulence in BTC.