🧵Unified Cross-Margin
Tap into the capital efficiency and unique trade strategies granted by Blitz's unified cross-margin engine across spot, perpetuals, and money markets.
Blitz deploys a unified cross-margin risk engine by default. All of Blitz's 3 core products, including spot, perpetuals, and money markets, are vertically integrated and bound together within a unified cross-margin trading engine.
Unified cross-margin is a feature that allows traders to use all their assets as collateral for their trading positions, enhancing capital efficiency and flexibility.
More specifically, it means that a user’s trading account (e.g., subaccount) consolidates liabilities to offset the margin between multiple open positions. As a result, a user’s portfolio functions as collateral supporting multiple open positions simultaneously.
On Blitz, your portfolio is your margin.
Trading accounts with unified cross-margin are uncommon in DeFi yet are prevalent in TradFi and centralized exchanges (CEXs). The scarcity of unified cross-margin on DEXs exists for several reasons., including but not limited to:
Complexity in Implementation: Implementing a unified cross-margin system in a decentralized environment is technically complex. It requires sophisticated smart contract logic to manage collateral across different assets, accurately assess risks, and execute liquidations efficiently. This complexity increases with the number of supported assets and their volatility.
Risk Management Challenges: Cross-margin trading increases the risk of systemic failures due to the interconnection of liabilities and assets. DeFi platforms must develop advanced risk management systems to handle these risks, which is challenging without centralized control. Ensuring the system can accurately assess the value of diverse collaterals in real-time and execute liquidations when necessary to protect the system's integrity is a non-trivial task.
Liquidity Concerns: A unified cross-margin system requires a high level of liquidity to ensure that positions can be adequately collateralized and liquidated across multiple assets. In the DeFi space, where liquidity can be fragmented across different protocols and assets, maintaining the necessary liquidity levels for efficient market functioning can be challenging.
Technological Constraints: The current state of blockchain technology, including factors like transaction speed, cost, and the block space required for complex operations, can limit the feasibility of implementing sophisticated features like unified cross-margin on DEXs. These constraints make it challenging to replicate the seamless experience found on centralized platforms that are widely popular.
Despite the prevailing constraints facing unified cross-margin implementations on DEXs, Blitz's implementation of a unified cross-margin engine also envelops 3 core DeFi primitives usually only available on siloed DeFi apps and not bundled together, including:
Additionally, Blitz's unified cross-margin implementation already has a robust and proven product-market fit with Vertex on Arbitrum already, with virtually no downtime since launch in April 2023 outside of scheduled maintenance windows.
Unified cross-margin on a vertically-integrated orderbook DEX like Blitz enables volumes to scale to much higher multiples of TVL -- meaning liquidity scales better as capital is more efficiently recycled and utilized within the Blitz trading engine.
The impact of a unified cross-margin engine also affords significant advantages to Blitz's unified cross-chain liquidity sharing for perpetuals with Vertex Edge.
Example: Applied to Blitz, the synchronous orderbook layer of Vertex Edge maintains embedded money markets across all of its cross-chain instances -- tied together with a user’s entire trading portfolio via unified cross-margin.
This is an important distinction for any Edge instance from incumbent money markets in DeFi — invoking a situation where the interest rate for a given money market pool remains consistent across Edge instances on different chains.
More specifically, Vertex Edge enables a single USDC deposit interest rate across all Vertex Edge instances, such as Blitz, enabling capital to flow freely between ecosystems — promoting the active use of capital where it can be best put to use. This generates cheap loans for the most active traders and ensures that passive capital allocators receive optimized yields.
Isolated Margin vs. Unified Cross-Margin
When evaluating margin and risk engines, It’s important to contrast two specific forms of margin:
Isolated Margin
Cross-Margin
Isolated Margin = An account’s liability is limited to the initial margin posted to a single position.
Cross-Margin = Multiple positions’ liabilities are shared across an account to offset the margin between the positions.
Isolated Margin
Isolated margin is often used for volatile, speculative positions and limits a user’s account balance risk.
It's popular widely for perpetuals trading on both DEXs and CEXs, and tends to be more straightforward for retail traders on CEXs.
Isolated Margin Example:
Alice has 20K USDC on Binance.
Alice opens a $BTC perp position worth $50K on 10X leverage using 5K of her USDC as collateral.
Alice’s position is liquidated.
Only the 5K USDC initial margin is at risk of loss. Her remaining 15K USDC is unaffected
However, offering purely isolated margin perpetuals limits the broader capital efficiency of an exchange platform. For example, some of the inherent limitations of isolated margin manifest as both exchange and user barriers, including:
Increased Capital Requirements: With isolated margin, traders must allocate specific amounts of capital to each position they open, without the ability to share collateral across multiple positions. This means traders need to lock up more capital in the DEX for each trade they want to make, reducing the amount of capital they can use for other opportunities.
Reduced Leverage Opportunities: Because each position has its own margin, traders may not be able to leverage their positions as effectively compared to a unified cross-margin system where all assets in an account could serve as collateral for any trade. This reduced leverage can make the DEX less attractive, especially for traders seeking to maximize their trading strategies with higher leverage.
Lower Liquidity Utilization: Isolated margin can lead to a fragmentation of liquidity since capital is spread out across multiple isolated positions rather than pooled. This fragmentation can make it harder for the DEX to optimize liquidity utilization, potentially leading to less efficient markets, wider spreads, and higher slippage.
Complexity and Inefficiency in Managing Multiple Positions: Traders managing multiple isolated margin positions may find it more cumbersome to adjust their overall trading strategy or re-balance their portfolio. This operational inefficiency can discourage active trading and reduce the volume and liquidity on the DEX.
Opportunity Cost: The capital locked up in isolated margins for each position represents an opportunity cost since it could have been deployed elsewhere for potentially higher returns. In a fast-moving market environment, the inability to quickly reallocate capital can result in missed opportunities.
Increased Risk of Liquidation: Although isolated margin limits the risk to the individual position, it also means that profitable positions cannot offset losing ones. This can increase the likelihood of liquidation on a position-by-position basis if the market moves unfavorably and the trader is unable to add more capital quickly.
Despite its limitations, isolated margin also offers a variety of valuable tools to traders, spanning:
Limited Risk to Single Positions: The primary benefit of isolated margin is the limitation of risk to the individual position. Losses on one trade cannot exceed the margin allocated to that specific position, protecting other positions and the trader's remaining balance from being affected by a single losing trade.
Precise Risk Management: Isolated margin allows traders to apply specific risk management strategies to individual positions. Traders can allocate capital based on the risk profile of each trade, enabling more precise control over their exposure.
Simplified Account Management for Certain Strategies: For traders focusing on specific strategies or trading only a few positions, isolated margin can simplify account management. Each position can be treated independently, making it easier to track performance and manage trades.
Enables Diverse Trading Strategies: Isolated margin accounts allow traders to experiment with various trading strategies while limiting their risk to specific positions.
More Predictable Liquidation Events: Since each position is isolated, traders can more easily predict and manage liquidation events. They know exactly how much capital is at risk and can make more informed decisions about when to add more margin or close a position to avoid liquidation.
Considering both the positives and negatives detailed above:
Blitz will natively offer unified cross-margin by default across spot, perpetuals and money markets out of the gate.
Blitz will be rolling out isolated margin trading accounts alongside unified cross-margin as part of Vertex's ongoing V2 Trading Engine rollout that includes Vertex Edge and a variety of other optimizations and new features.
Unified Cross-Margin on Blitz
Cross-margining enables users to reduce margin requirements by calculating the portfolio’s overall risk across multiple positions. Open positions share capital toward each position’s margin requirements – reducing the risk of single-position liquidations while requiring a lower initial margin for each position.
On Blitz, you can utilize all your funds—deposits, positions, and PnL— toward your margin.
This means your open positions across spot, perpetuals, and the money market (e.g., spot borrowing) contribute to your account’s portfolio margin.
Users can trade more flexibly and efficiently as the risk of margin calls and forced liquidations for single positions declines. Additionally, unified cross-margin across multiple products enables some unique features to users scarcely available elsewhere in DeFi.
Blitz's unified cross-margin engine also allows for portfolio margining.
Similar to regular cross-margin, portfolio margining is where unrealized profits can be used to offset unrealized losses or deployed as margin for existing positions or for opening new positions. All of the relevant balancing of a portfolio's margin are calculated automatically on the Blitz back-end and displayed intuitively as a trading account’s portfolio health on the Blitz app.
Unified cross-margin trading accounts can be beneficial for both sophisticated and retail traders for several reasons, including but not limited to:
Lower Margin Requirements: Cross-margin accounts typically have lower margin requirements than traders opening the same positions in separate, isolated margin accounts.
Example: A Blitz trader with a long position in spot margin ETH and a short position in ETH perpetuals may have a lower cumulative margin requirement than a trader with the same position in isolated margin accounts.
Automated Risk Management: Blitz enables traders to avoid liquidations more intuitively by automatically calculating and transferring margin between open positions to maintain the required margin levels. This is useful for traders in volatile market conditions and when trading complex strategies.
Example: A trader on Blitz can open a long ETH spot position alongside a short wBTC perpetual position without manually transferring margin between the accounts to maintain the required margin levels – it’s performed automatically and displayed on the portfolio page.
Risk / Reward Optimization: Traders can adjust the leverage of their positions across multiple positions to suit their individual risk preferences – it’s more capital-efficient.
Example: Alice can maintain a highly leveraged long position in $wBTC and a lower leverage short position in $ETH, achieving a better risk-reward ratio than a trader with the same positions in isolated margin accounts. This is because Alice can set a higher margin requirement for a highly leveraged long perpetual position and a lower margin requirement for a lower leverage short perpetual position on Vertex.
Portfolio Margining: A specific type of cross-margin, portfolio margining is when unrealized profits from an open position can be used to offset the margin requirements of another position.
Example: If the value of Alice’s long ETH spot margin position on Blitz falls, the excess margin (e.g., unrealized profits) in Alice’s short ETH perp position may be used to maintain the required margin level, avoiding liquidation of the long spot margin position.
Simplified Account Management: Overall portfolio health and risk indicators are easily accessible in a single Blitz interface – the Portfolio Overview. Trading with multiple open positions is streamlined as Blitz’s trading accounts offer a sweeping view of traders’ overall risk, where all their open positions are linked and managed together.
For an exhaustive walk-through of navigating across your unified cross-margin portfolio and various spot, perpetual, and money market (e.g., spot borrowing) positions on Blitz, please refer to the Tutorials Section.
For precise attributes of the technical terminology related to your unified cross-margin trading account, including Account Value, Unsettled USDC, Initial Margin, and more -- please refer to the Blitz Glossary.
Managing Portfolio Risk
Managing your portfolio on Blitz is simple.
Enjoy a sweeping view of your unified cross-margin trading account in one interface, comprising all of your open positions, deposit, and other account information.
The Blitz app supplements the clarity of the portfolio overview page with specific risk tiers, intuitively alerting users to fluctuations in the weighted value of their portfolio’s Health.
Health is the amount of capital (quoted in USD) your account has to trade with before it can be liquidated.
You can think of Health as your Weighted Margin / Risk.
You have two different kinds:
1. Maintenance
2. Initial
Your Health is determined by giving each balance and position a Weighted Value. Initial health is weighted greater for shorts and less for longs when compared to Maintenance.
For more details on weighting, please refer to the section on Health Calculations.
Once all of your Initial Health is depleted, your account goes into Maintenance Mode, which means no more risk can be taken – such as opening new positions.
The remaining Maintenance Health acts as a buffer for the user to de-risk before jeopardizing liquidation. Once all of the Maintenance Health is depleted, your account can be liquidated.
On Blitz, calculations of Weighted Value (e.g., portfolio health) are performed automatically on the back end and reflected in a user’s portfolio overview page on the Blitz app interface as the portfolio’s Health.
Users are encouraged to be mindful of the current portfolio state of their trading account on Vertex. Markets are unpredictable, and proper risk management necessitates concerted attention to your portfolio’s risk tiers
The Blitz trading interface will notify users when their accounts reach higher levels of risk, prompting them to deposit more assets into Blitz to reduce their overall portfolio risk or close open positions.
Unified Cross-Margin -- Trade Strategy Examples
The advantages of unified cross-margin on Blitz can be illustrated further by examining two types of popular trade strategies within DeFi markets:
The Basis Trade
Leveraged Looping (Spot Borrowing)
The Basis Trade
Basis trades are a common trade strategy where traders typically capture the spread between two products:
1. Spot
2. Futures
The spread (i.e., the “basis”) is the difference between the spot and futures price.
The spot and futures prices eventually converge at maturity, and the profit is the difference between the initial prices minus fees. It’s a classic amongst derivatives traders in both TradFi and DeFi, expressed most often with spot and futures products.
Perpetual swaps are the most popular futures product in crypto.
With no expiration, perpetuals maintain price parity with the underlying spot asset via funding rates where interest is paid on open positions relative to the difference between the perpetual and indexed spot prices.
Spot and perpetual prices don’t necessarily have to converge completely and can deviate for extended periods.
Comparatively, the expiration date of vanilla futures contracts is the primary force converging futures with spot prices as the expiry approaches.
Crypto basis trades with both perpetuals and spot assets are popular since the perpetuals price typically trades at a premium to spot prices – meaning basis trades of long spot / short perp are typically profitable and delta neutral positions.
However, basis trades are more capital-intensive on many exchanges than Blitz since they usually require two separate markets for the perpetual and spot positions.
With linked spot and perpetual markets, Blitz will provide traders with native markets for basis trading.
Example:
If Alice is long ETH spot on Binance and short an ETH perpetual contract on isolated margin, her open perpetual contract is treated as a standalone position.
Alice is responsible for maintaining the full margin requirement – even if she has an offsetting spot ETH position.
As a result, arbitrage becomes unnecessarily capital inefficient.
On Blitz, unified cross-margin with linked spot and perpetual markets ameliorates the arbitrage inefficiency of basis trading while allowing traders to offload residual risk with minimal friction.
Since Blitz’s on-chain risk engine recognizes the redundancy of requiring the full margin amount for the ETH perpetual position in the example of Alice above, the margin requirement for the ETH perpetual is substantially reduced – allowing for more capital-efficient trading.
Blitz's embedded money market also allows assets to be used as both collateral and available for borrowing to leverage spot positions. As a result, the basis rate is more closely tethered to the borrowing rate of stables and tokens.
Profitable arbitrage conditions arise when basis returns > borrowing costs.
Advantageous arbitrage conditions on Blitz generate a compounding effect of greater volumes and improved liquidity since traders can execute profitable basis trade strategies on Blitz with leverage and lower margin requirements.
Leveraged Looping (Spot Borrowing)
Otherwise dubbed "Turbo Looping," leveraged looping of spot borrowing from a money market is a popular way to amplify price exposure in DeFi without using leveraged perpetuals.
For example, you can achieve similar leverage as perpetuals by borrowing against spot collateral on a money market like Aave, where you:
Hold ETH.
Swap for wBTC.
Use that wBTC as a deposit to borrow more ETH.
Use that ETH to swap for more wBTC.
Rinse & repeat.
03/11/2024: Please note that wBTC is used as an example for spot borrowing above, but won't initially be available on Blitz once it launches on the Blast mainnet.
With incubment DeFi money markets, looping spot borrows requires numerous steps – it’s trickier than perpetuals. Additionally, anyone lending you more ETH against your wBTC deposit will also likely reserve some of the wBTC value as insurance against your loan.
Traders refer to the above as a “haircut” on your BTC collateral. This is precisely how lending platforms like Aave work -- they provide the rules of engagement for secured lending.
But looping retains some explicit benefits compared to perpetuals when it comes to leverage, including:
You own the spot asset -- meaning you can withdraw your assets to other DeFi apps.
Lower price manipulation risks.
Cheaper -- money market rates are usually less volatile than perpetual funding rates.
On Blitz, the steps for performing leveraged spot looping are vastly reduced.
For example, you can simply switch leveraged spot to ON in the spot trading panel. Blitz takes care of the rest.
No more manually repeating each step of depositing and then borrowing on a siloed DeFi money market.
You can even auto-borrow assets against your margin to trade with larger sizes on Blitz. In effect, the benefits of leveraged spot looping are fused with the simplicity of trading perpetuals.
Regarding perpetual funding rates, money market rates also tend to be less volatile for major assets like BTC and ETH. On average, leveraged spot is generally cheaper than perpetuals for longer-duration trades.
Cheaper carry costs with leveraged spot unlock better returns on trades (e.g., hedging on different venues) where holding an open position is necessary.
More Examples:
Typical looping trades (e.g., ETH - STETH) don’t play well with perpetuals. Basically, you need leveraged spot.
Considering doing a cross-currency trade (e.g., BTC vs. ETH)? You guessed it – leveraged spot.
Leveraged basis trading? Yup, you'll need leveraged spot.
Unified cross-margin on Blitz unlocks an array of advantages, unique trade strategies, and benefits in liquidity expression and capital efficiency not readily available with standalone, isolated margin.
Trade on Blitz -- Unleash your trading with unified cross-margin.
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