Cross-Margin Lending vs Isolated Margin Lending

Shared collateral pool: All positions share one margin balance. This allows for higher leverage on individual trades without posting additional collateral. This matters for sophisticated traders running complex, multi-leg strategies (e.g., delta-neutral positions) who need to maximize capital utilization.

Systemic portfolio risk: A single losing position can drain the shared margin, triggering a liquidation cascade across all open positions. This matters for volatile market conditions where correlated assets move against you, exemplified by events like the LUNA collapse affecting connected positions on platforms like Aave.

Ring-fenced collateral: Each position has its own, isolated collateral pool. Losses are strictly capped to the funds allocated to that trade. This matters for speculative bets on high-volatility assets (e.g., new meme coins or low-cap alts) where you want to experiment without jeopardizing your entire portfolio.

Locked, non-reusable capital: Collateral is siloed and cannot be used to margin other positions or earn yield elsewhere. This leads to lower overall capital efficiency. This matters for capital-constrained traders who cannot afford to have idle funds sitting in multiple isolated vaults on protocols like dYdX or GMX.

Unified collateral pool: All deposited assets back all borrowed positions, maximizing leverage potential. This is critical for sophisticated strategies like delta-neutral farming on GMX or Aave, where capital can be redeployed across multiple positions without fragmentation. Enables higher effective LTV ratios than the sum of isolated limits.

Liquidation cascades: A single underperforming position can trigger a liquidation that consumes collateral from all positions, leading to rapid, total account wipeout. This creates protocol-level systemic risk, as seen in events like the November 2022 FTX/Alameda collapse, where cross-margin accounts faced disproportionate losses. Requires sophisticated risk engines like Gauntlet.

Position-specific collateral: Each leveraged position is siloed with its own collateral. A liquidation event is confined to that single position, protecting the user's overall portfolio. This is essential for retail-facing platforms (e.g., dYdX's isolated markets) and for experimenting with new, volatile assets where risk is poorly understood.

Inefficient capital lock-up: Collateral cannot be shared, forcing users to overallocate capital to open multiple positions. This reduces potential yield from strategies like recursive lending/borrowing loops on Compound or Euler. Results in lower aggregate borrowing power and suboptimal capital deployment for advanced users.

Unified collateral pool: All deposited assets back all open positions. This maximizes capital efficiency, allowing for higher leverage on a single position without posting additional collateral. This matters for advanced traders managing a diversified portfolio who want to optimize for total portfolio exposure rather than per-trade risk.

Systemic portfolio risk: A sharp drop in one asset can trigger a margin call on the entire portfolio, leading to the liquidation of other, potentially profitable, positions. This matters for volatile market conditions where correlated assets move together, as seen during major market downturns on platforms like dYdX or Aave.

Position-specific collateral: Each leveraged position is backed by its own, isolated collateral pool. Losses are strictly capped to the funds allocated to that position. This matters for experimental strategies or trading new assets (e.g., a new L2 governance token), as a total loss in one trade does not affect other capital.

Fragmented collateral: Capital cannot be reused across positions, leading to lower overall leverage potential and idle funds. This matters for high-frequency strategies or arbitrageurs who need to deploy capital rapidly across multiple opportunities, as seen as a key limitation on platforms like GMX's isolated pools.