Demystifying Position Components on Increment: vTokens, Collateral, and PnL
Holding any trader or liquidity provider position on Increment involves three key components:
Collateral
vTokens
PnL (profit and loss)
The vTokens held by a user are not backed in a 1:1 ratio by collateral. In fact, the value of vTokens is typically backed by a relatively small amount of collateral, calculated based on the formula that involves parameters like minimum margin, collateral weight, and market risk weight. For example, vTokens worth $100 might be backed by a collateral deposit of only $16, depending on the given parameters.
In other words, vTokens are perceived as the user's borrowed sum, while the collateral that underpins these vTokens represents the requisite margin for securing this debt amount. The amount of vTokens or debt that the user holds is calculated differently when going long:
,when going short:
,and when providing liquidity:
However, when it comes to PnL, the story is different. Any PnL incurred by a user’s position must be backed at least in a 1:1 ratio by collateral. If a trader suffers a loss of $10 in a trade, they are required to have at least $10 of collateral in addition to what is already deposited to cover the vToken debt. If the loss incurred deepens, then the position may be liquidatable based on the free collateral formula:
Free collateral must be greater than or equal to 0 for a position to be within the margin requirement.
In summary, different components of a position have different backing requirements, ensuring that if one trader owes another due to a loss in a trade, they possess the necessary collateral to settle the owed amount. This guarantee of collateral is a vital aspect of the Increment system.
Increment is a decentralized, algorithmic perpetual swaps protocol building on zkSync Era, featuring automatically concentrated liquidity, dynamic fees and parametrizable pools.
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