Cross-margin

Instead of isolating collateral per position, cross-margin aggregates all deposited assets into a single margin account. This pool backs the total risk of all open positions. The margin requirement is calculated against the net exposure of the entire portfolio, not each individual trade. This allows for more efficient use of capital, as excess margin from one position can cover the requirements of another.

The primary advantage is the optimal utilization of capital. Unused or excess margin from profitable or low-risk positions is automatically available to support new or under-margined positions. This reduces the need for frequent top-ups and allows traders to take on larger aggregate exposures with the same amount of initial capital compared to an isolated margin system.

Liquidation risk is assessed at the portfolio level. A liquidation event is triggered when the total value of the collateral pool falls below the maintenance margin requirement for the entire book of positions. This means a profitable position can help prevent the liquidation of a losing one, but conversely, one large losing position can jeopardize all others in the pool.

Risk is managed by calculating the portfolio's net exposure. For example, in perpetual futures trading, long and short positions in the same asset may partially offset each other, reducing the overall margin requirement. The system dynamically computes the net delta or notional value, requiring margin only for the net risk, not the gross sum of all positions.

This is the direct counterpart to isolated margin, where collateral is allocated and risk is contained per position. Key differences:

• Cross-margin: Capital efficiency, portfolio-level risk, higher potential for cascading liquidations.
• Isolated Margin: Defined risk per trade, no cross-position collateral sharing, liquidation isolates loss to a single position.

Cross-margin is favored by:

• Sophisticated traders & funds managing complex, multi-leg strategies (e.g., delta-neutral portfolios, hedging).
• Arbitrageurs who need capital efficiency across correlated positions.
• High-frequency trading algorithms that benefit from reduced collateral friction. It is less suitable for beginners or for highly speculative, uncorrelated bets where risk containment is a priority.

In a cross-margin system, a single undercollateralized position can trigger the liquidation of the entire collateral pool. This creates a systemic risk where a price drop in one asset can cause forced selling across all positions, potentially leading to a liquidation cascade that depresses asset prices further and impacts all users of the pool.

Cross-margin concentrates counterparty risk. Users are not just exposed to the protocol's smart contract risk, but also to the collective risk of all other participants in the pool. A failure or malicious action by one large participant can jeopardize the solvency of the entire shared margin pool for all others.

The integrity of the entire cross-margin pool depends on the accuracy of price oracles. A manipulated or stale price feed for any asset in the pool can incorrectly mark all positions, triggering unjustified liquidations or allowing positions to become undercollateralized without detection, risking pool insolvency.

Liquidity Providers (LPs) to a cross-margin vault face amplified impermanent loss. The pool's collateral composition changes dynamically as positions are opened/closed and liquidations occur. LPs are exposed to the volatile performance of the entire portfolio of collateral assets, not just a single trading pair.

Contrasted with isolated margin, where risk is contained to individual positions, cross-margin's shared pool model is a fundamental protocol design choice with significant trade-offs:

• Isolated Margin: Limits loss to initial collateral per position; higher capital cost.
• Cross-Margin: Maximizes capital efficiency; creates interconnected, system-wide risk.

Protocols implement safeguards to manage cross-margin risks:

• Dynamic Risk Parameters: Adjusting Loan-to-Value (LTV) ratios and liquidation thresholds per asset.
• Circuit Breakers: Pausing liquidations or new positions during extreme volatility.
• Overcollateralization Requirements: Mandating high initial collateral ratios for the pool.
• User Education: Clearly communicating that deposited funds back all positions.

A contrasting risk model where collateral is allocated and segregated to a single position. This prevents losses in one trade from affecting others, offering greater capital protection but lower capital efficiency compared to cross-margin.

• Key Feature: Position-specific liquidation.
• Use Case: Preferred for high-volatility assets or experimental strategies.

An advanced, net-risk calculation method used by centralized exchanges like the CME. It evaluates the overall risk of a portfolio, considering correlations and offsets between positions, to determine a single margin requirement. It is a more sophisticated form of cross-margin analysis.

The discount applied to an asset's value when calculating its collateral worth. In cross-margin systems, different assets have varying haircuts (e.g., BTC 10%, altcoin 30%) to account for volatility and liquidity risk, directly impacting the user's borrowing power and liquidation threshold.

The automated system that monitors collateral ratios and executes liquidations. In cross-margin, this engine must continuously compute the health of the entire account, not individual positions, triggering a liquidation event when the total collateral value falls below the maintenance margin for the net portfolio.

The minimum collateral ratio required to keep positions open. In a cross-margin account, this is a global threshold for the entire portfolio. If the account's equity (total collateral minus total borrowed value) falls below this level, the liquidation engine is activated.

A traditional finance service that provides unified cross-margin accounts for institutional clients across multiple asset classes and trading venues. Decentralized protocols aim to replicate this functionality, allowing a single collateral pool to be used across various DeFi applications.