Cross Margin

The core engine behind cross-margin is portfolio margin calculation. Instead of evaluating each position in isolation, the protocol's risk engine:

• Nets offsetting positions (e.g., long ETH / short BTC).
• Calculates a portfolio-level maintenance margin requirement.
• Uses correlation models or volatility estimates to reduce margin for hedged portfolios.
• Triggers a portfolio liquidation if the total collateral falls below the aggregate requirement, closing multiple positions.

In cross margin, a single undercollateralized position can trigger the liquidation of the entire account's collateral pool. This creates systemic risk where:

• A sharp price drop in one asset can liquidate unrelated positions.
• Forced selling during market stress can exacerbate price volatility.
• Protocols must carefully calibrate liquidation thresholds and health factors to prevent chain reactions.

Pooling diverse assets as collateral introduces correlation risk. Key considerations include:

• Asset volatility: High-volatility collateral can rapidly degrade the account's overall health.
• Correlation breakdown: In a crisis, supposedly uncorrelated assets (e.g., ETH and a stablecoin) may become correlated, reducing the intended diversification benefit.
• Oracle risk: Reliance on price oracles for multiple assets increases attack surfaces for manipulation.

Security is highly dependent on the smart contract implementation:

• Code vulnerabilities: Bugs in the margin engine can lead to incorrect health calculations or faulty liquidations.
• Upgrade risks: Governance-controlled upgrades to the margin logic can introduce new risks.
• Integration risks: Reliance on external protocols for lending, oracles, or liquidations adds dependency risks.

In decentralized finance (DeFi), the trader is ultimately the counterparty to the protocol. Risks include:

• Protocol insolvency: If the protocol's treasury or insurance fund is insufficient to cover bad debt from a mass liquidation event, losses may be socialized.
• Liquidator incentives: The design of liquidation incentives and auction mechanisms is critical to ensure liquidators act promptly without extracting excessive value.

Traders and protocols can mitigate cross-margin risks through:

• Position isolation: Using sub-accounts or vaults to segregate high-risk strategies.
• Dynamic risk parameters: Adjusting loan-to-value (LTV) ratios and liquidation penalties based on market conditions.
• Over-collateralization: Maintaining a health factor significantly above the minimum threshold.
• Continuous monitoring: Using tools to track portfolio health and set up alerts for margin calls.

Cross-margin trading, especially when involving leverage, may attract regulatory scrutiny:

• It can be classified as a form of margin lending, subject to financial regulations.
• KYC/AML requirements may apply depending on jurisdiction and protocol structure.
• The pooling of assets can complicate consumer protection and loss attribution in dispute resolution.

A risk management method where collateral is allocated to a single position. This creates a defined, isolated risk pool, preventing losses from one trade from affecting others. Key characteristics include:

• Defined Risk: Maximum loss is limited to the collateral posted for that specific position.
• No Cross-Contamination: A liquidation in one isolated position does not impact other open positions or the trader's general account balance.
• Higher Capital Efficiency for Hedging: Often used to take opposing positions without the risk of them offsetting and triggering liquidation.

The minimum amount of collateral required to open a new leveraged position. It is expressed as a percentage of the notional value of the trade. For example, a 10x leverage trade requires an Initial Margin of 10%. This acts as a buffer against initial price volatility and is a key component in calculating maximum position size based on available capital.

The minimum amount of equity a trader must maintain in a position to keep it open, expressed as a percentage of the position's value. If the account's equity falls below this threshold, a margin call or automatic liquidation is triggered. In cross margin, the maintenance margin requirement is checked against the total account equity, not individual positions.

The process triggered when account equity falls below the Maintenance Margin requirement.

• Margin Call: A warning to add more collateral.
• Liquidation: The forced closure of positions by the protocol to bring the account back to a solvent state. In cross margin, all positions can be liquidated to cover the deficit, as collateral is shared. The liquidation price is the price at which this event occurs.

The use of borrowed capital (margin) to increase the potential return of an investment. It is expressed as a ratio (e.g., 5x). In cross margin, leverage is dynamic and aggregate; the effective leverage of the entire account changes with the P&L of all open positions. High leverage amplifies both gains and losses, increasing liquidation risk when using a shared collateral pool.

An investment strategy to reduce risk by taking an offsetting position. Cross margin complicates hedging because profits and losses from opposing positions net against each other within the shared collateral pool. This can reduce the effectiveness of the hedge or unintentionally trigger liquidation if the net account equity falls. Traders often use isolated margin accounts for precise hedging strategies.