Collateral

In plain English

Collateral is the financial buffer behind a derivatives position. Gains can increase that buffer and losses, fees, or funding payments can reduce it. If the remaining eligible value becomes too small for the venue’s maintenance requirement, the position or account can enter liquidation.

Collateral is related to margin but the words are not always interchangeable. Collateral is the asset value supplied; margin is the required amount or ratio the position must satisfy.

How it works

In isolated margin, a specified pool of collateral supports one position. In cross margin, eligible account collateral supports multiple positions together. Cross margin can use gains or spare equity elsewhere in the account, but a loss in one market can also endanger other positions.

Venues decide which assets qualify, how they are valued, and whether a haircut is applied. A volatile token worth $1,000 at one moment may provide less than $1,000 of eligible collateral value.

Why it matters

Position size should follow the amount a trader can put at risk, rather than starting from the maximum leverage offered by an interface. The collateral asset also creates its own exposure. A trader can be directionally correct on the perpetual and still lose support if non-stable collateral falls in value.

Worked example

A position begins with $1,000 of eligible collateral. It has a $150 unrealized trading loss, has paid $8 in funding, and has accrued $2 in fees.

Ignoring other adjustments, its remaining collateral equity is $1,000 - $150 - $8 - $2 = $840. Whether $840 is healthy depends on the venue’s current maintenance margin, not on the starting collateral alone.

How it works on Lynx

On Lynx, the selected collateral asset is also the settlement asset and identifies the isolated liquidity pool behind the trade. Fees and PnL are paid in that token, even when the traded instrument references a different asset.

Lynx does not use the collateral token’s external market price to determine position health. A move in the collateral token alone therefore does not move an otherwise unchanged position toward liquidation.

Common misconception

Collateral is not automatically the maximum possible loss. Some venue designs, account models, market gaps, or liquidation outcomes can create losses or obligations beyond the amount initially assigned to one position.