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Classical Margin Trading Explained

Margin trading allows participants to perform larger trades by borrowing third-party funds. This borrowing mechanism is often hidden away "behind-the-scenes" and traders are simply given the option to Long/Buy or Short/Sell with as much leverage as they wish. Just as in ordinary borrowing, margin traders pay a percentage interest fee to compensate lenders for using these borrowed funds for their trades.
Of course, you cannot just borrow for free, and a certain amount of collateral has to be given in exchange for this borrowing favour. This is also known as "initial margin" and acts as protection in case the trading market moves in the opposite direction to how the trader anticipates. If the market moves too far in the wrong direction, to the point where the collateral can no longer cover the cost of the position, a trader's position is liquidated so that the borrowed funds are not lost.

The Decentralized Version

  • Smart contracts handle the borrowing and return of funds
  • Margin trading positions are represented by composable NFT's that can be chained together
  • The Automated Market Maker acts as the buying/selling mechanism
  • Decentralized price oracles (originally built by Uniswap) act as the source of truth for price data
  • Decentralized liquidators continuously monitor on-chain price data and positions and liquidate unhealthy trades
  • Fees from different parts of the system go to token holders, vault managers and the decentralized insurance fund
  • All of this logic is tied together by smart contracts in a trustless, decentralized fashion
  • A web UI makes performing trades easy or traders can interact with the smart contracts directly
  • System parameters can be voted on by members of the SSB DAO
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