Margin Pool
Learn how Margin Pool component is specified, and why it's integral part of the margin system on Gamma Options
Last updated
Learn how Margin Pool component is specified, and why it's integral part of the margin system on Gamma Options
Last updated
The Margin Pool component in Gamma Options facilitates the borrowing and lending operations required to support margin trading. Its primary objective of this component is to offer a secure and dynamic environment where liquidity can be borrowed from lenders and utilized by traders and LPs.
Lenders supply assets to the Margin Pool to provide liquidity for margin trading. In return, they profit through accrued interest on their deposits. Given the platform's risk-managed approach and rigorous structural design, lending in Gamma Options offers an attractive low-risk avenue for asset growth.
Traders and liquidity providers (LPs) actively borrow funds from the Margin Pool to leverage their trading positions. In return for accessing this liquidity, they pay an interest rate, directly benefiting the lenders. This structure ensures that lenders are compensated for providing their assets, fostering a symbiotic relationship between all participants in the Gamma Options ecosystem.
The interest rate within Gamma Options is dynamic, adjusting to the ever-changing market conditions. This ensures fairness and transparency in its financial ecosystem. Notably, Gamma Options stands apart by not extracting any cut from the interest, ensuring maximum returns for the lenders.
Within our system, we distinguish between two interest rates:
Lending rate
Borrowing rate
Before delving deeper, it's essential to clarify three core terms. First, we have the liquidity in the margin pool, representing the total funds available. Next, we have the borrowed funds, indicating the total amount currently loaned out. From these, we derive the utilization rate, which is calculated as borrowed funds divided by liquidity.
The utilization rate becomes the linchpin for determining lending and borrowing rates. The following chart provides a clearer visual representation of how these rates interact with the utilization rate.
The borrowing rate (as seen on the graph above) is a direct function of the utilization rate, where kinks (utilization rate percentages) and slope multiplier coefficients are configurable through governance. The system is set so that the borrowing rate is fixed at 12% while the Margin Pool is in the “safe zone” (between 30% and 80% utilization rate). Breaching an 80% utilization rate starts to represent a risk to the system igniting the exponential growth of the utilization rate.
The lending rate is a direct function of the borrowing rate and the total amount of liquidity in the Margin Pool. The lower the liquidity the higher the lending rate and vice versa.
The determination of both interest rates is intricately tied to the balance of liquidity and borrowing demands in the Margin Pool. As such, users might observe fluctuations in the rate, primarily influenced by the liquidity-to-borrow ratio of the pool (utilization rate). The dynamic interest rate system is set to self-regulate the Margin Pool lent and borrowed amounts through supply/demand. The bigger the demand for loans - the higher the interest rate. The higher the interest rate - the bigger the incentive for lenders to stake in the Margin Pool, and for the borrowers to close out risky positions, reducing the interest rate and keeping the system in equilibrium.
In the event of liquidity scarcity, where lenders cannot immediately withdraw due to all funds being borrowed, they will be compensated with the maximum interest rate until they can access their funds.
Please note that interest rates can go up to 400% as the utilization rate approaches 100%. Such a high borrowing rate incentivizes borrowers to repay their debt, while it also incentivizes lenders to deposit additional funds to the Margin pool.
Lenders can deposit ETH and USDC into the Margin Pool either from their wallets or from their existing Margin Accounts, increasing the pool's liquidity. Depositing funds reduces interest rates, primarily due to the subsequent decrease in the utilization rate.
Lenders can withdraw their deposits to their wallets or their Margin Accounts at any time, provided there are sufficient un-borrowed funds in the Margin Pool.
A limitation is set to avoid a rug-pull event in which lenders withdraw the entire liquidity from the pool: withdrawals that would leave the system with a utilization ratio above the redeem limit are prohibited. At the moment the redeem limit sits at 85% and is configurable through governance.
Traders and LPs can borrow funds from the Margin Pool to engage in margin trading based on their margin requirements and the collateral provided.
Borrowers are responsible for closing their positions and returning borrowed funds to the Margin Pool. The return must include the principal amount and the accumulated interest. Returning borrowed funds is done automatically when positions are closed. In addition, the borrowers can return the entire or part of their debt at any time and avoid or reduce the interest rate.
This technical specification provides a detailed overview of the Margin Pool Component's functionality and operations in the Gamma Options margin system. It is designed to be a guiding document for developers and stakeholders involved in the implementation and management of this component.
