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Each time a long or short position is opened, a trader posts some margin depending on the desired leverage. This margin is used to cover any potential losses and, if the losses are above a certain threshold, the position is liquidated. To our knowledge, in any other forward or futures exchanges, this margin is unused. Our protocol aims at using the trader's margin for better capital efficiency:
- When a long position is opened, less DAI is borrowed (see previous section). E.g. given the trader posts 60 DAI as margin and the protocol needs to buy 1 ETH when ETHDAI=100 DAI, the protocol will only borrow 40 DAI and add to it the trader’s 60 DAI.
- When a short position is opened, more DAI is lent. E.g. given the trader posts 60 DAI as margin and the protocol has borrowed 1 ETH when ETHDAI=100 DAI, the protocol will lend 160 DAI.
This innovation brings specific behaviours to our protocol which differ from other forward and futures platforms.
The price to open a long position is lower than the price to open a short position. One could think that the "bid" and "ask are inverted and, hence, a risk-free arbitrage could be made! On Contango protocol, a trader doesn't simply exit a position by hitting the other side of the market. Instead there is a specific price to exit a position, depending on the costs associated to exit borrowing and lending positions at a fixed rate on other protocols.
Below are provided examples to open a long position for
where the spot