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A Dive into Margin

Whether it be TradFi or DeFi - the term “margin” is commonplace in either market. Margin acts as the nonexclusive denotation of the collateral required to cover credit risk in the event of borrowing funds from a broker to borrow or purchase financial instruments. 

In other words, think of margin like a deposit for a loan, except the loan taken out is strictly for the purpose of investment endeavours, meaning margin is a redundant concept when taking out a loan for anything else, such as a home or a car.

Yet margin, when applied to the DeFi world, has a tendency to teeter into more complex territory, drawing away from the clear-cut binary between isolated and cross-margin. Let’s navigate it together.

DeFi Margin vs. TradFi Margin ?

Think of DeFi’s interpretation of margin as the younger brother of TradFi margin - it’s young, fresh, and pushes boundaries its brother would never have gotten away with. But as with any sibling duo, you always need to look upon the eldest to see the family resemblance with the youngest.

Yet, it is important to note that our young cherub here encompasses only a small portion of DeFi margin, as many protocols still draw from the familiarity of TradFi concepts. Many projects are fixated on the deliverance of financial tools and products, and have a tendency to build upon an infrastructure already inherent within the financial world. But, we have chosen to push the envelope and rewrite this narrative.

TradFi margin has always remained relatively clear-cut in the distinction betweencross or isolated margin, with little composabilitybetween the two. In essence, if you want to borrow money to buy some equities, you will deposit a collateral payment (or margin) before borrowing from a broker. Acting as protection to the broker, in the event repayments fail or some other issue arises, the broker can simply liquidate the collateral and still walk away with mitigated credit risk and some form of return. 

Yet when this is applied to DeFi it comes as no surprise that the permissionless nature of DeFi butts heads with the i-owe-you-if-you-do-this agreement. Acting as a ceasefire amidst this conflict is the ability of users within some ecosystems to provide collateral, meaning they can stake a claim over repayments and collateral as they enter the ecosystem in a lending pool model. Ultimately this model exposes users to a lack of capital efficiency, as volatility and the inability for collateral to be divided and relocated when required ultimately hikes up repayments to extortionate levels. But with a vast majority of projects across the ecosystem bearing comparable mechanisms, the specificities of TradFi margin have seeped into blockchain. 

Whilst this system is very black and white, our version of DeFi Margin makes things a bit more interesting. . Gone are the days of manually depositing collateral in a multitude of places, it can now be as simple as relocating your collateral into another account, which in essence, acts like another crypto wallet. By storing your margin here, you can simply forget about it and easily access it if required.

Abandoning the binaries of isolated and cross margin and vying for composability, DeFi’s take on margin instead features a hierarchy within the realm of cross margin. This spectrum encompasses cross asset, cross product, and cross protocol, with the technical complexity ramping up as the boundaries of technology are stretched further. Think of these different tiers being what you can use a loan for. 

Take cross protocol for example, if you wanted to buy an asset that was only available on a DEX such as Serum, you could simply connect your Jet wallet to the DEX and deposit your collateral into your margin account. Upon doing so, you can transfer the funds outside of Jet and into Serum and utilise them to trade, generate profit, and keep the value in Serum, yet the mechanism still recognises this value as collateral - despite you having ownership of the value. So, if you’re unable to repay your debt or your account goes ‘under water’ (where the volatility of the market is monitored by off chain infrastructure to assess the risk and viability of repayment), this collateral will be reclaimed. Supported by a fixed rate and fixed term loan, this system ensures that liquidation occurs as soon as the account goes underwater, as well as activating mechanism guards to prevent user access to excessive loans.

The introduction of interconnectivity across cross protocol margin, cross-product-collateralisation, and the interaction of various loan types demonstrate the supremely flexible nature of the margin youth and the cutting edge beginning of the margin (V2M) journey.

What Can Margining in DeFi Achieve?

Having already disrupted two takes on margin mechanisms, the new era of DeFi margin is only just rearing its head. 

Thousands of DeFi protocols are intent on delivering financial products at a rapid rate - yet this requires lending, borrowing, trading, and reams of other facilitations that frankly, very few have the resources for. Margin integration requires even more intensive manpower, funds, and time consumption, particularly if each intricate component is to be created in-house. 

Who has the time for that? 

Let’s make things simple. As the stepping stone for projects across every corner of DeFi, we allow protocols to simply tap into our pool of white labelled infrastructures. From liquidators to exchange connectivity, we offer a composable and flexible system from the ground up to be as unobtrusive as possible.

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