DeFi: what is multi-collateral?

The winning mix? – Perpetual Protocol wants to offer a DEX (decentralized exchange) where users of the platform can trade perpetual contracts in a decentralized way. The v2 of the protocol will offer a new feature: the multi-collateral. The following lines aim to clarify the notions of collateral and multi-collateral in the decentralized finance.

DeFi and multi-collateral protocols: towards the end of the reign of Tether or USD coin?

Traders who want take advantage of offers from cryptocurrency exchanges in terms of derivatives or margin trading, generally have to deposit guarantee – a collateral – to be able to use the leverage effects.

What is the point of using leverage when trading an asset? A trader who has a capital of 200 €, can double the position he opens, if he applies to his bet a leverage effect x2 – times 2. Leverage effects significantly increase their earningsbut also their possible losses.

The guarantees required by the cryptocurrency exchanges to be able to use these levers correspond usually to stablecoins such as Tether (USDT) and USD Coin (USDC).

However, accepting only one type of collateral has drawbacks for traders. The latter may simply not have access to these services requiring the deposit of a single guarantee, if he does not own the relevant asset.

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Multi-collateral makes it possible not to be dependent on a cryptocurrency

Multi-collateral consists of use more than one digital asset as collateral. It thus makes it possible to totally or partially eliminate this friction.

By accepting several cryptocurrencies as collateral, a DeFi project also avoid being dependent of a single cryptocurrency – an important point in terms of risk management.

Multi-collateral is also a way to manage risks relating to the variation in the value of guarantees which are not stablecoins, when traders use leverage.

The value of a single collateral deposited in order to be able to trade crypto derivatives, must indeed stay above a certain level called the maintenance marginwhen a trader opens a leveraged position.

Otherwise, if the value of the collateral falls below this threshold, the position risks being liquidated, and the trader may then lose his collateral. This problem arises if the trader uses a volatile single collateralwhich is therefore not a stablecoin.

By depositing more than one guarantee whose prices are not strongly positively correlatedthe trader can thus cover a possible collapse of the price of an asset, by another.

While some centralized exchanges already offer multi-collateral, few DeFi protocols offer this feature today.

Perpetual Protocol wants to promote the use of multi-collateral in decentralized finance, by adding the functionality to v2 of the protocol. DeFi is full of interesting concepts and tools but with obscure terminologies. Beginners will benefit from watching this video to better understand certain key concepts in the sector.

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