Understanding Cross Collateralization

Perpetuity's cross collateralization system enables lending of assets to earn interest or borrowing of assets using existing crypto holdings as collateral.

How it Works: Core Concepts

1. Lending: Crypto is deposited into a lending pool. These assets can be borrowed, with interest earned based on the amount lent versus the current interest rate.
2. Borrowing: Crypto assets are deposited as collateral. Based on the collateral value, other crypto assets or stablecoins can be borrowed and withdrawn from the system.
3. Collateral: If the collateral value drops significantly, the collateral may be sold to cover the loan amount.
4. Interest: Borrowers pay interest on loans, while lenders earn interest on deposits. Rates are typically variable and depend on:
   • Supply and demand (utilization rate)
   • Comparative market rates
   • Price volatility

Borrow Lending Terminology

Asset Weights

Asset weights determine how much of a deposited asset's value counts towards collateral:

Initial Asset Weight

• Applied when calculating initial borrowing power
• Example: If an asset has an initial weight of 0.8 (80%)
  • A $100 deposit would contribute $80 to initial borrowing power
• More conservative than maintenance weight to provide safety buffer

Maintenance Asset Weight

• Applied when calculating ongoing collateral requirements
• Usually higher than initial weight
• Example: If an asset has a maintenance weight of 0.9 (90%)
  • A $100 deposit would contribute $90 to maintenance collateral

Liability Weights

Liability weights determine how much collateral is required to cover borrowed assets:

Initial Liability Weight

• Applied when calculating initial borrowing requirements
• Example: If an asset has an initial liability weight of 1.5 (150%)
  • Borrowing $100 would require $150 worth of weighted collateral

Maintenance Liability Weight

• Applied when calculating ongoing margin requirements
• Usually lower than initial weight
• Example: If an asset has a maintenance liability weight of 1.25 (125%)
  • A $100 borrow requires $125 of weighted collateral to maintain and not be liquidated

Weight Relationships

• Initial weights are more conservative than maintenance weights
• Asset weights are typically < 1.0 (reducing effective collateral value)
• Liability weights are typically > 1.0 (requiring extra collateral coverage)
• The difference between initial and maintenance weights creates a safety buffer
• More volatile assets typically have:
  • Lower asset weights (less collateral value)
  • Higher liability weights (more collateral required)

Please note if too many borrows happen, the initial weights will become more conservative.

Unrealized PnL and its Impact on Collateralization

Unrealized Profit and Loss (PnL) from open perpetual futures positions also interact with your collateral.

• Negative Unrealized PnL: If a perp position is in a loss, negative unrealized PnL reduces the total account equity. This affects both a user's initial maintenance and initial assets when calculating collateral.

• Positive Unrealized PnL: Positive unrealized PnL works differently. It doesn't increase initial assets, but it does affect when the user can be liquidated and their initial maintenance balance. In order to open a larger position or withdraw money, a user must first realize their positive PnL by closing out their position.

Examples: Unrealized PnL Impact

Here's an illustrative example:

Let's assume a user has deposited $1000 USDC as collateral. For simplicity, let's say USDC has:

• Initial Asset Weight: 0.9 (90%)
• Maintenance Asset Weight: 0.95 (95%)

Initial State (No Open Positions):

• Deposited Collateral: $1000 USDC
• Initial Assets (for opening new positions or borrowing): $1000 * 0.9 = $900
• Maintenance Value (for calculating liquidation threshold): $1000 * 0.95 = $950

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Scenario 1: Negative Unrealized PnL

The user opens a perpetual futures position (e.g., SOL-PERP). The position moves against the user, resulting in an Unrealized PnL of -$200.

• Impact on Total Account Equity: The negative PnL reduces the total account equity.

  • Effective Account Equity = $1000 (initial deposit) - $200 (unrealized loss) = $800

• Impact on Collateral Calculations:

  • Initial Assets (for new positions/borrowing): This is now calculated based on the reduced equity.
    • $800 * 0.9 (Initial Asset Weight) = $720
    • The user's capacity to open further positions or borrow more is reduced from $900 to $720.
  • Initial Maintenance Balance (for liquidation): This is also reduced.
    • $800 * 0.95 (Maintenance Asset Weight) = $760
    • The account is now closer to its liquidation threshold because its maintenance value has decreased from $950 to $760.

In summary for Negative PnL: A $200 unrealized loss directly reduces both the user's ability to take on new risk (initial assets) and their buffer against liquidation (initial maintenance balance).

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Scenario 2: Positive Unrealized PnL

The user opens a different perpetual futures position (e.g., ETH-PERP). The position moves in the user's favor, resulting in an Unrealized PnL of +$300.

• Impact on Total Account Equity (for maintenance):

  • Effective Account Equity (for liquidation calculation) = $1000 (initial deposit) + $300 (unrealized profit) = $1300

• Impact on Collateral Calculations:

  • Initial Assets (for new positions/borrowing): Positive unrealized PnL does not increase initial assets.
    • It remains calculated based on the original deposit: $1000 * 0.9 (Initial Asset Weight) = $900
    • The user cannot use the $300 unrealized profit to open a larger new position or withdraw more funds until it is realized.
  • Initial Maintenance Balance (for liquidation): Positive unrealized PnL does increase the maintenance balance, making the account safer from liquidation.
    • The maintenance value is now calculated based on the equity including the positive PnL: $1300 * 0.95 (Maintenance Asset Weight) = $1235
    • The user is further from liquidation as their maintenance value has increased from $950 to $1235.