Non-Custodial Margin

Users retain exclusive control of their private keys and collateral assets, which are never held by a central exchange. Collateral is typically deposited into an audited, non-upgradable smart contract (e.g., a lending pool or vault). This eliminates counterparty risk from the platform operator but introduces smart contract risk.

Any user with a Web3 wallet can access these protocols without KYC. All transactions, positions, interest rates, and liquidations are recorded on-chain, providing full transparency. Key metrics like Loan-to-Value (LTV) ratios, liquidation thresholds, and available liquidity are publicly verifiable.

Instead of a centralized risk desk, liquidations are triggered automatically by off-chain actors called keepers or liquidators. They monitor positions and execute liquidation transactions when a position's health factor falls below a predefined threshold (e.g., collateralization ratio < 110%), earning a bounty. This creates a decentralized marketplace for risk management.

Non-custodial margin protocols are designed as interoperable building blocks. A leveraged position can be used as collateral in another protocol (e.g., for yield farming), or integrated into a complex DeFi strategy via a single transaction. This enables advanced financial engineering but also compounds systemic risk.

To secure loans in a trustless environment, protocols require borrowers to deposit collateral worth more than the loan value. Typical initial LTV ratios range from 50% to 85%. This overcollateralization acts as a buffer against volatility and ensures the protocol remains solvent, distinguishing it from undercollateralized lending in TradFi.

Borrowing and lending rates are not set by a central entity but are determined algorithmically based on utilization rates. As demand for a specific asset increases, its borrow rate rises dynamically to incentivize more lenders and discourage additional borrowing, aiming for market equilibrium. Common models include linear and kinked rate curves.

The primary financial risk in margin trading. If the value of your collateral falls below the protocol's liquidation threshold, your position is automatically liquidated to repay the loan. This process often incurs a liquidation penalty (e.g., 5-15%) paid to the liquidator, resulting in significant loss of capital. Market volatility can trigger cascading liquidations across many users.

The core protocol logic is encoded in immutable smart contracts. Vulnerabilities such as reentrancy, oracle manipulation, or logic errors can lead to the loss of all user funds. This risk is amplified by the use of complex DeFi Lego integrations (e.g., yield-bearing collateral, flash loans). Users rely entirely on the quality of the code audit and the security of any upgradable proxy contracts.

Margin protocols depend on price oracles (e.g., Chainlink, Pyth) to determine collateral values and trigger liquidations. If an oracle provides stale, incorrect, or manipulated price data, it can cause:

• Unwarranted liquidations at incorrect prices.
• Insolvent positions that are not liquidated, threatening protocol solvency. Oracle failure is a systemic risk for the entire lending market.

Liquidations require immediate sale of collateral on decentralized exchanges (DEXs). If the market lacks sufficient liquidity, the liquidation sale can cause high slippage, worsening losses for the user being liquidated. This can also create bad debt for the protocol if the sale does not cover the borrowed amount, potentially socializing losses among other users.

Non-custodial systems shift security burdens to the user. Critical risks include:

• Private key management: Loss or theft leads to total, irreversible loss.
• Transaction errors: Incorrectly setting gas, approving malicious contracts, or signing malicious transactions.
• Health ratio monitoring: Failure to actively monitor positions or add collateral during volatility.

Governance tokens often control critical protocol parameters. Risks include:

• Governance attacks: A malicious actor could acquire enough tokens to vote for harmful parameter changes.
• Risky updates: Even well-intentioned governance may adjust collateral factors, liquidation penalties, or oracle choices in ways that increase user risk. Users must trust the decentralized governance process.

A self-executing program on a blockchain that automatically enforces the terms of an agreement. In non-custodial margin, smart contracts manage collateral, execute liquidations, and distribute profits without a central intermediary. They are the foundational technology enabling trustless lending and borrowing.

A risk management requirement where a borrower must deposit collateral worth more than the loan value. This creates a safety buffer (e.g., 150%) to protect lenders against price volatility. It is a fundamental principle of most decentralized lending protocols, including those offering margin.

The forced closure of a leveraged position when its collateral value falls below a maintenance threshold. A liquidator repays the borrowed funds in exchange for the discounted collateral, ensuring the protocol remains solvent. This is a critical risk mechanism in margin trading.

A peer-to-peer marketplace where users trade cryptocurrencies directly via smart contracts, retaining custody of their assets. Non-custodial margin platforms often integrate with DEXs to execute the underlying trades for leveraged positions, completing the DeFi trading loop.

A smart contract containing pooled funds from users (liquidity providers) that facilitates trading, lending, or other financial services. In margin protocols, these pools provide the source of borrowed assets for traders and earn interest from loan fees.

A real-time metric representing the safety of a leveraged position. It is calculated as Collateral Value / Borrowed Value. If this ratio drops below a protocol-defined minimum (e.g., 1.1), the position becomes eligible for liquidation to protect lenders.