Collateral Maintenance

Users must top-up their collateral above 5% notional to avoid their position being unwound.

Currently, only USDC is used for collateral. However, we are working diligently to enable any major cryptocurrency to be used as collateral for any Synth Option.

When you create a synthetic option, you are required to post initial collateral equivalent to 10% of the notional of the option. The synthetic option algorithm requires this collateral to fund the portfolio of tokens and perpetuals that replicate the option. There are two distinct scenarios by which a user's collateral either accrues value or loses value based on the direction of the market:

1. Self-Funding Value Scenario. Market is increasing the value of the Synth Option, and the profits help self-fund the required collateral to maintain the position.

2. Deprecating Value Scenario. Market is decreasing the value of the Synth Option, and the losses are making the user's collateral lose value.

Self-Funding Value Scenario

If you have a Call Synth, and the underlying token price goes above the strike, the profits generated by the algorithm will increase the value of your collateral. Conversely, if you have a Put Synth, and the underlying token price goes below the strike, the profits generated will likewise increase the value of your collateral.

Suppose these so-called ‘delta-profits’ are large enough to keep the value of your collateral above 10% of notional. In that case, your synthetic option is ‘self-funding’, and you won’t need to make any additional collateral top-ups.

Deprecating Value Scenario

However, if your synthetic option is not ‘self-funding’, your collateral will gradually reduce over time, driven by the costs of running the algorithm. If collateral drops below 7.5% of notional, we will ask you to top-up the collateral back up to 10%.

Suppose you choose not to do so, and the collateral drops below 5% of notional, rather than auto-liquidating your position, we will cut the notional covered by your synthetic option by 50%. By doing so, your collateral will again be equivalent to 10% of notional.

You will be able to withdraw collateral above 10% of notional, allowing you to extract option profits without having to close your synthetic option.