Collateral Requirements & Management

'Trustless' full collateralization

The Elektro Protocol is based on counterparty-risk free on-chain settlement. Participants must provide full collateral funding for any orders they submit at the time when an order is submitted into an orderbook. Please see the Elektro Contract Specifications for exact details of collateral amounts for the different contract types.

Typically, option buyers have to fully fund the limit price of an order for the potential premium that is to be paid in the case of a matched trade. Option sellers have to provide funds as collateral that match the maximum liability of the option that they are trying to sell.

The currency in which the collateral has to be provided depends on the exact contract for which an order is being submitted. Similar to settled positions after a trade has been matched (please see section On-Chain Settlement for more details), collateral is being held for participants within an escrow like on-chain smart contract called FundLock.

Participants can access their funds and deposit funds into or withdraw funds from the FundLock smart contract at any time. Any deposit or withdrawal is an on-chain transaction.

The orderbook will reject any new order or any updates to existing live orders if the funds required to cover the trade premium or the collateral are not available within the FundLock contract at the time of order submission or order update. If a participant withdraws funds from the FundLock smart contract that render them below the level of required funds for all the outstanding live orders of the participant, the platform will automatically cancel live orders until the available funds match the collateral and premium requirements of the remaining live orders.

When the Elektro Clearing Engine (ECE) executes a trade, Option Contract buyers must pay the premium in the Price Currency; Option Contract sellers receive that premium. Option Contract sellers also have to provide the required Trade Collateral Amount in Collateral Currency for the Option Contract they sold. The Trade Collateral Amount is being locked up in a Smart Contract for the duration of the trade until the traded Contract is exercised (see below).

The calculation of the Trade Collateral Amount follows the below set steps:

Step 1 - Calculation of the Collateral Amount

Step 2 – Calculation of the Scaled Collateral Amount The Scaled Collateral Amount is calculated by multiplying the Collateral Amount with the Contract Size and the Multiplier of the Contract.

Step 3 – Calculation of the Trade Collateral Amount The Trade Collateral Amount is calculated by multiplying the Scaled Collateral Amount with the quantity of the trade that was executed for the Option Contract seller

Collateral Optimization

Elektro requires, as described already, orders and trades to be fully collateralized in order to guarantee pay-outs to counterparties. For example, for a user to sell a call option on 1 BTC against USDC, user needs to post 1 BTC collateral. Collateral Optimization enables the above-mentioned collateral requirements to be determined on a portfolio basis, which results in lower overall collateral requirements because of the presence of offsetting or partially offsetting trades. Under Collateral Optimisation, instead of collateral being determined on a trade-by-trade basis, collateral required is based on the maximum loss in the user’s portfolio of Elektro products as a whole.

Portfolio collateral optimization process:

When a user places an order, the standard collateral per the Collateral requirements is
locked up
After execution of the order in step 1), the Elektro Collateral Optimisation engine
computes the required collateral for the user’s portfolio of Elektro contracts and returns
any excess collateral posted to the user

Collateral optimization logic and examples

Assuming BTC/USDC as the underlying (WBTC):

1) Calculate the quantity of BTC needed as collateral when the BTC/USDC price at expiry goes to infinity

2) Calculate USDC collateral required when the BTC/USDC price at expiry: a. Is equal to each level of strikes in the portfolio b. Is equal to 2)(i) +/- a small increment (to check for discontinuities in payoff) c. Zero

3) Compute 1) minus each of the amounts calculated in 2). If any of these amounts is negative, the amount of USDC collateral required is the minimum of the negative amounts.

4) The total collateral required is 1) + 3)

Example 1 Portfolio:

1) If BTC/USDC approaches infinity, the amount of BTC collateral required = 3 BTC

2) USDC collateral at specific BTC/USDC prices:

3) Compute 1) – 2):

4) Total collateral required = 3 BTC

Example 2

Portfolio:

1) If BTC/USDC approaches infinity, the amount of BTC collateral required = 0 BTC

2) USDC collateral at specific BTC/USDC prices:

3) Compute 1) – 2):

4) Total collateral required = 6000 USDC