Cross-Margin vs Isolated Margin in On-Chain Trading

Detailed Instructions

Begin by gathering the specific parameters of your open position. The initial margin is the capital you have allocated to the position. The position size is the total value of the assets you control, including borrowed funds. The collateral asset and traded asset must be identified, as their price volatility and correlation are critical. For example, a position using ETH as collateral to trade a WBTC/USDC pair has different risk dynamics than one using USDC. Record the leverage ratio, which is the position size divided by your initial margin. A 5x leverage on a $1,000 deposit controls a $5,000 position. These parameters are the foundation for all subsequent risk metrics.

solidityCopy
// Example struct for a position in a hypothetical protocol
struct Position {
    address trader;
    address collateralToken; // e.g., 0xC02aaA39b223FE8D0A0e5C4F27eAD9083C756Cc2 (WETH)
    address debtToken;       // e.g., 0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48 (USDC)
    uint256 collateralAmount;
    uint256 debtAmount;
    uint256 positionSize; // collateralAmount + debtAmount
}

Tip: Always verify the on-chain oracle address for your collateral asset to ensure your risk model uses accurate, real-time prices.

Detailed Instructions

The liquidation price is the most critical risk metric. It is the price of the collateral asset at which your position's equity equals the maintenance margin requirement. For a long position, the formula is: Liquidation Price = Entry Price * (1 - Initial Margin Ratio) / (1 - Maintenance Margin Ratio). If you enter a long ETH position at $3,000 with 20% initial margin and a 15% maintenance margin, the calculation is: $3,000 * (1 - 0.20) / (1 - 0.15) = $2,823.53. For cross-margin, this calculation is more complex as it depends on your entire portfolio's net equity. Use the protocol's specific formula, often available in its documentation or smart contracts. Monitor this price closely, as a 1-2% move against you can trigger liquidation during high volatility.

javascriptCopy
// JavaScript function for long position liquidation price
function calcLiquidationPriceLong(entryPrice, initialMarginRatio, maintenanceMarginRatio) {
    return entryPrice * (1 - initialMarginRatio) / (1 - maintenanceMarginRatio);
}
// Example: calcLiquidationPriceLong(3000, 0.20, 0.15) returns 2823.529411764706

Tip: For isolated margin, this price is fixed per position. For cross-margin, it is dynamic and recalculated whenever you open/close any position in your account.

Detailed Instructions

Calculate the price distance to liquidation as a percentage: (Current Price - Liquidation Price) / Current Price. For the ETH example at a current price of $3,100, the distance is ($3,100 - $2,823.53) / $3,100 = 8.92%. This represents your safety buffer. Next, evaluate this against the asset's historical volatility. Check the 24-hour or 1-hour price range on a DEX like Uniswap V3. If ETH regularly experiences 5% swings, an 8.92% buffer may be adequate in normal conditions but risky during major news events. For cross-margin, you must calculate the distance for your net portfolio value against the global maintenance margin. A sharp move in one asset can reduce the buffer for all your positions simultaneously, increasing systemic risk.

• Sub-step 1: Fetch the current spot price from a reliable on-chain oracle like Chainlink.
• Sub-step 2: Compute the absolute and percentage distance to your liquidation price.
• Sub-step 3: Compare this percentage to the asset's recent realized volatility (e.g., from a 20-day moving average).
• Sub-step 4: For cross-margin, use a dashboard or script to compute the portfolio's aggregate health factor.

Tip: Set up price alerts at 50% and 75% of your calculated buffer distance to give yourself time to manage the position.

Detailed Instructions

Stress testing your position reveals worst-case outcomes. Calculate the maximum loss for an isolated margin position, which is typically your initial margin plus any trading fees. For a $1,000 margin at 5x leverage, the max loss is $1,000. For cross-margin, the maximum loss can exceed a single position's margin, potentially affecting your entire deposited collateral balance. Run scenarios: What happens if the price gaps 10% past your liquidation price in a flash crash? The liquidation penalty (often 5-10%) will be applied, and you may receive less collateral back due to slippage. Use historical flash crash data (e.g., the March 2020 crash or a specific exploit event) to model these tail risks. Consider the impact of funding rates in perpetual contracts, which can erode profits or amplify losses in a ranging market.

pythonCopy
# Python snippet for simple loss scenario
initial_margin = 1000.0
leverage = 5.0
liquidation_penalty = 0.05 # 5%

# Simulate a 15% price drop triggering liquidation
position_size = initial_margin * leverage
estimated_loss = initial_margin + (position_size * liquidation_penalty)
print(f"Estimated loss with penalty: ${estimated_loss:.2f}") # Outputs $1250.00

Tip: Always account for network congestion and high gas fees during volatility, which can delay stop-loss or margin-top-up transactions, effectively reducing your usable buffer.

Detailed Instructions

Use the Kelly Criterion or a fixed fractional sizing method to determine how much capital to risk per trade. A common rule is to risk no more than 1-2% of your total portfolio equity on any single isolated margin position. If your portfolio is $50,000 and your calculated maximum loss for a trade is $1,000, you are risking 2%. For cross-margin, this calculation must be holistic. The combined maintenance margin of all open positions should leave a significant buffer of unencumbered capital (e.g., 30-50% of portfolio) to absorb losses and avoid cascading liquidations. Calculate your portfolio's aggregate leverage and ensure it aligns with your risk tolerance. Advanced traders monitor the Greeks (Delta, Gamma) for options or perpetual futures to understand sensitivity to price moves and volatility changes.

• Sub-step 1: Calculate total portfolio value and total margin used across all positions.
• Sub-step 2: Compute the portfolio leverage: Total Position Value / Total Portfolio Equity.
• Sub-step 3: For each new trade, calculate its contribution to the overall portfolio risk.
• Sub-step 4: Adjust position sizes or close positions to maintain your target risk parameters.

Tip: In cross-margin, a highly correlated portfolio (e.g., long ETH, long LINK) has higher systemic risk than an uncorrelated one. Use asset correlation data from Covariance matrices or DeFi analytics platforms in your models.