Maintenance (& Leverage)
Both LPs (makers) and traders (takers) need to provide collateral to participate in Perennial markets. Initially, collateral will be provided in the form of DSU (wrapped USDC — see more on DSU here). In the future, markets may be able to be created with any type of collateral to create both physically & cash settled markets.
The first version of Perennial is single-collateral so each Market has their own segregated collateral account within the
Collateralcontract. Perennial uses $USD proxies (i.e. USDC/DSU) as collateral and assumes the price of these assets is $1.
Funding payements & transaction fees are settled by the collateral account of a position, meaning that an open positions paying funding will slowly increase in leverage, and an open position earning funding will slowly decrease in leverage.
Note that though it is not recommended, Product owners have the freedom to design risky Products. Perennial has built in safeguards to gracefully handle and resolve insolvency within individual markets if the Product owner so chooses to recapitalize them. Any insolvency in one market should have no affect on any other market in the Perennial protocol.
Both makers & takers have the ability to trade in a more capital efficient manner by using leverage. This allows a participant's notional exposure to far exceed the amount of collateral provided. Solvency of the system is ensured by a maintenance margin & liquidation system (explained next).
Maximum leverage = 1 / (maintenance %)
Ex. if maintenance is 20%, then 1 / 20% = 5, so 5.0x max leverage.
A maintenance margin is set by the market operator. It is the minimum ratio of collateral to notional exposure that a market will allow. This sets how much notional exposure a maker can provide and how much leverage a taker can get.
If the value of the collateral posted by a maker or taker falls below the maintenance requirement, the maker/taker position will enter liquidation to ensure solvency of the protocol.
Both makers and takers have a maintenance requirement based on the notional of their position times the margin percentage requirement for the product.
ETH = $1000for this example.