Positions Management
To maintain our positions, we need to continuously rebalance and settle, thereby improving capital efficiency.
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To maintain our positions, we need to continuously rebalance and settle, thereby improving capital efficiency.
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As introduced above, we use the user's ETH as margin and short the ETH/BTC pair to achieve price pegging. When the value of ETH/BTC doubles, our margin would be exhausted. However, this situation won't actually occur because we will constantly realize unrealized gains and promptly replenish the margin, keeping the maintenance margin ratio at a low level.
Most exchanges support a combined margin mode, meaning we can use BTC or ETH spot as margin. When realizing gains, we can convert them into BTC or ETH in real-time. We also need to reopen positions to hedge against price changes in the ETH/BTC pair.
Here is an introduction to the relevant scenarios:
Due to our short positions in ETH/BTC, we generate profits when this trading pair's price decreases. However, these are unrealized gains. If we realize these gains, we can actually obtain more ETH. At the same time, we need to immediately hedge these profits and re-establish corresponding positions.
When the currency pair price rises, we incur losses. If it continues to rise, our margin may become insufficient, potentially triggering liquidation. To prevent this, we immediately replenish the margin. However, margin replenishment rarely occurs because when the currency pair price increases, it usually means the collateral value also increases. We have a system in place that monitors our Maintenance Margin Ratio (MMR) in real-time and implements appropriate measures before extreme market conditions occur.
Moreover, the price fluctuations of the ETH/BTC pair are very small. Historically, the fluctuations in 15mins have never exceeded 20%. This gives us ample time to realize unrealized gains.
Currently, the system rebalances whenever it detects unrealized gains exceeding 10%. Historically, this situation rarely occurs.
Due to the minimal fluctuations, we don't need to use all assets as margin at all times. Therefore, we can open a small leverage position to free up more margin for collateral, thereby increasing returns and significantly improving capital liquidity. When the system detects that the margin is gradually becoming insufficient, we will cancel the collateral and promptly replenish the margin. However, due to the position adjustment mechanism, this situation rarely occurs.
Therefore, the user's assets serve two main purposes: one is to act as margin, and the other is to be used as collateral to generate staking rewards. Hence, we need to promptly adjust the user's funds to maximize our returns and minimize the risks of our project.
Overall, our algorithm aims to maximize capital efficiency while ensuring security, thereby increasing the protocol's returns. Additionally, a portion of BTC is retained for liquidity purposes.
