Leverage & Margin

When trading NFTs on our platform, you don't need to put up the entire value of the underlying NFT. Instead, you can buy NFTs by using only a fraction of the underlying value in ETH or USDC as collateral. We provide leverage for all perpetual contracts, with ETH and USDC serving as the quote asset for all markets. Our cross-margin mode allows you to open multiple positions that share the same collateral. The maximum leverage available depends on the notional value of the positions, with lower leverage for larger positions.

At Ariable, leverage is determined by the initial margin and maintenance margin. The Initial Margin is the minimum amount of funds required to open a position. This calculation is done by multiplying the average open price, contract quantity, and contract size.

The Maintenance Margin is the minimum fraction of margin required to prevent liquidation. If the position collateral falls below the maintenance margin, the position will be liquidated. The maintenance margin rate and tiered adjustment factor increase with the position size, ensuring larger positions have higher margins to prevent liquidation.

How to calculate it?

When user creates position we are taking their position size, which initial margin (collateral) size multiplied by leverage, and calculating it's open position notional size:

$$positionSize = initialMargin * leverage$$

$$openPositionNotionalSize = positionSize * entryPrice$$

To calculate current margin ratio we will need to also calculate unrealized profit and loss (PnL) which will be collection price change multiplied by open position size and added funding rate (which can be positive or negative) that occurred:

$$unrealizedPnL=(currentPrice - entryPrice)*positionSize + fundingRate$$

This value will be then used to calculate current margin ratio:

$$marginRatio = \frac{initialMargin + unrealizedPnL}{ openPositionNotionalSize}$$

To make protocol solvent an liquidation mechanism is applied that takes into account minimum maintenance margin. This margin is a minimum ratio between notional value and the margin.

$$positionNotional = positionSize * marketSize$$

If positions margin ratio become lower than minimum maintenance margin, then liquidation, triggered by bots, will occur. That way protocol sustain solvent and rest of notional size goes to protocol and bot revenue.