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The protocol uses an isolated margin model. Each position has independent collateral that determines leverage, liquidation threshold, and maximum loss. Margin rates are snapshotted at position open time.

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Position Equity

equity = lockedMargin + unrealizedPnL
ParameterTypeDescription
lockedMarginOnchain: stored in Position structUSDC collateral locked for this position (mutable via margin adjustments)
unrealizedPnLComputed: derived from current forward priceMark-to-market profit or loss (signed)
ConditionStatus
equity >= lockedMarginHealthy — profitable or breakeven
MM <= equity < lockedMarginUnderwater — losses but not liquidatable
equity < MMLiquidatable — anyone can close the position
equity <= 0Bad debt — losses exceed margin, pool absorbs the rest

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Two Margin Levels

Every position has two thresholds that create a buffer zone between opening and liquidation. 
minIM = notional × imFactorBps / BPS_DENOMINATOR
mmThreshold = notional × mmFactorBps / BPS_DENOMINATOR
ParameterDefaultDescription
imFactorBps200 bps (2%)Minimum collateral to open. Onchain: stored in Config
mmFactorBps100 bps (1%)Liquidation threshold. Onchain: stored in Config
BPS_DENOMINATOR10,000Fixed constant
The protocol enforces imFactorBps > mmFactorBps — any attempt to violate this reverts. This gap creates the buffer: equity starts above IM and must erode through the buffer before liquidation. 
|---- Notional (100%) ----|
|-- IM (2%) --|
|- MM (1%) -|
              ^            ^
              |            |
        Liquidation    Position
         threshold      opens here
For current parameter values, see Margin Requirements.

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Variable Leverage

Traders choose their own margin within [minIM, notional]. More margin means lower leverage and a larger liquidation buffer.
MarginLeverageBuffer Before LiquidationBest For
2% (minimum)50x~1% adverse moveHigh-conviction short-term trades
5%20x~4% adverse moveActive trading with moderate risk
10%10x~9% adverse moveBalanced risk/reward
20%5x~19% adverse moveConservative positions, longer tenors
100%1xCannot be liquidatedFull hedging, maximum safety

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Isolated Margin

Each position’s margin is completely independent:
  • A loss on Position A does not affect Position B
  • Maximum loss per position is capped at that position’s locked margin
  • Free collateral in your account is never at risk from open positions
  • Liquidation of one position does not affect others
In a cross-margin system, all positions share a common margin pool. A loss on one position can drain margin from others, and the entire account balance is at risk.The protocol defines a MarginMode enum with ISOLATED (0) and CROSS (1) values, but only isolated margin is implemented in M2. The isolated model provides clearer risk boundaries and prevents cascading failures.

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Margin Operations

Add Margin

Increases locked margin, reducing leverage and increasing the liquidation buffer.
  • Allowed at any time, even when liquidatable (rescue mechanism)
  • Total locked margin cannot exceed notional
  • Amount transfers from free collateral

Remove Margin

Decreases locked margin, increasing leverage and freeing collateral.
  • Not allowed when liquidatable
  • Remaining margin must stay above minIM
  • Equity after removal must stay above MM threshold

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Snapshotted Rates

When a position is opened, margin configuration parameters are snapshotted and stored with the position:
Snapshotted FieldDescription
snapshotImBpsInitial margin factor at time of open
snapshotMmBpsMaintenance margin factor at time of open
snapshotTradingFeeBpsTrading fee rate at time of open
snapshotLiquidationPenaltyBpsLiquidation penalty at time of open
snapshotOracleFeeOracle fee at time of open
Admin configuration changes only affect newly opened positions. Existing positions retain the parameters they were opened with — no admin action can retroactively move the liquidation threshold.

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Worked Example

Setup:
  • Notional: 1,000 USDC
  • Margin deposited: 50 USDC (5%, 20x leverage)
  • Minimum IM: 20 USDC (2%)
  • MM threshold: 10 USDC (1%)
After -30 USDC unrealized PnL:
Locked margin: 50 USDC
Equity: 50 + (-30) = 20 USDC
Status: underwater but above MM (20 > 10)
Add 25 USDC margin:
Locked margin: 75 USDC
Equity: 75 + (-30) = 45 USDC
Leverage: 1,000 / 75 = 13.3x (safer)
Price recovers, PnL now +15 USDC:
Locked margin: 75 USDC
Equity: 75 + 15 = 90 USDC
Remove 30 USDC margin:
Locked margin: 45 USDC (45 >= 20 min IM — allowed)
Equity: 45 + 15 = 60 USDC (60 >= 10 MM — allowed)
Leverage: 1,000 / 45 = 22.2x
When a position’s market PnL loss exceeds its locked margin (|marketPnl| > imLocked), the excess becomes bad debt. The trader’s realized loss is capped at imLocked, and the remaining loss is absorbed by pool equity. A BadDebt event is emitted for monitoring. The pool equity floor is clamped to zero — it cannot go negative.

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Account Equity

Beyond individual positions, the protocol tracks aggregate account equity: 
accountEquity = collateralBalance + aggregateUnrealizedPnL
Computed: aggregateUnrealizedPnL sums unrealized PnL across all open positions. Available via the subgraph for informational purposes.