⚖️Margin
Margin system overview - what are the components, and how they interoperate together
Last updated
Margin system overview - what are the components, and how they interoperate together
Last updated
The margin system integrated into Gamma Options is a crucial component that enables secure and efficient trading of European options on the Ethereum blockchain. The margin system allows traders to borrow funds from liquidity pool to sell or issue options, amplifying their buying power and potential returns but also increasing their potential risks.
This system encompasses several key components, including the Margin Pool, Margin Account, Margin Account Health, and Account Liquidations. Together, these components provide an overview of how the margin system operates within Gamma Options.
The Margin Pool is a pool of funds within Gamma Options that traders/LPs can borrow from to increase their trading power. By accessing the Margin Pool, participants can leverage their positions and enhance their potential returns. The availability of borrowed funds is determined by the collateral provided by lenders, which ensures a balanced and risk-managed approach to margin trading. Lenders are passive systems participants, whose profit is the interest rate accrued on lended funds.
For more information on how the Pool component works, see Margin Pool Details.
The Margin Account is a dedicated account for users to manage their collateral and borrowed funds. Users must deposit collateral into their Margin Account to ensure the necessary funds are available to cover potential losses. This collateral acts as a safeguard and allows participants to engage in trading without risking their entire holdings.
Margin Account Health (or Health) is measured by the health formula:
HEALTH = TOTAL_LIQ / DEBT,
where TOTAL_LIQ is the total Margin Account liquidity, including posted collateral, open positions value, and funds borrowed from the Margin Pool. The health formula calculates the ratio of the total liquidation value to the user's debt. It plays a vital role in assessing the risk level of a user's position within the margin system.
By monitoring and maintaining a healthy margin ratio, users can mitigate the risk of liquidation and ensure the stability of their positions.
If a user's margin account health falls below a specified threshold (configurable through governance), the liquidation process may be initiated. Liquidation involves transferring the entire debt and all the positions in the liquidated margin account to another user. Apart from debt and positions, in case of successful liquidation, the liquidator will be rewarded with an additional 5% of debt worth of liquidity. Another 5% of debt will go to the insurance fund. This amounts to a 10% debt penalty on the liquidated account. The only requirement for the liquidator is that his Account Health remains above the pre-mentioned threshold after the liquidation.
The reward system is designed to incentivize users to participate in the liquidation process while maintaining the platform's stability.
A deeper dive into the liquidation process is done in the Account Liquidation chapter.
In a margin system implemented by Gamma Options, when a trader decides to open a position, they express a desire to enter a trade using borrowed funds to amplify their purchasing power. To begin, the trader deposits an initial amount of money, known as the "initial margin," into their Margin Account. This amount serves as collateral and determines the position size they can open. It's important to note that the trader might be able to control a position many times larger than their initial deposit, thanks to the leverage provided by the margin system.
On position opening, the borrowed funds are automatically withdrawn from a Margin Pool. The trader's potential profits or losses are calculated based on the total size of the leveraged position, not just the initial margin they deposited. As the market moves, the net liquidity in the trader's margin account (the total value of the account minus the borrowed amount) fluctuates. If the account health drops below a certain threshold, the trader might face account liquidation. Conversely, if the trade is profitable, the gains are credited to the trader's account, after deducting any interest (see Margin Pool chapter for more details on interests) owed for borrowing the funds.
The margin system within Gamma Options, encompassing the Margin Pool, Margin Account, Margin Account Health, Liquidations, and Insurance Fund, provides a comprehensive framework for secure trading and risk management. By utilizing collateral and borrowed funds and monitoring health, users can engage in margin trading while maintaining the stability and integrity of their positions.