Unified Margin Risk Question

The Unified Margin Risk Question

"If I can use all my positions as collateral for other positions, does this not increase the risk that one highly leveraged user causes many other users to get liquidated, or that there are now many dependencies making World Markets more fragile? This sounds too good to be true."

This is a common question, which we have noticed comes with a lot of misconceptions. Here is how to think about it.

The Question

The question to ask is, "Are there scenarios in which the liquidation engine cannot recover enough USD to pay back all creditors, i.e. pay back all counterparties to the loans and perp positions in the portfolio?" It is specifically these scenarios which have risk.

Other Exchanges Manage with ADLs

Most perps exchanges "manage" this problem with ADLs. The exchange or associated operator takes over your positions, whether they are making or losing money, and closes them out. On centralized exchanges, this mechanism, typically called the "Insurance Fund" translates to a kind of internal trading desk which trades against you, and without any reporting or transparency, under the guise of "risk management." One would expect full transparency if these exchanges had nothing to hide, as it would benefit users, who would in turn trust the exchange more, benefiting the exchange. You can read more about World's liquidation process in Liquidation & No ADLs.

World has No ADLs

World has no ADLs.

World Manages Risk with Onchain Parameters

Instead, the problem is managed with fully onchain, verifiable, per-asset risk parameters. Because the future is not knowable, there is no perfect solution, anywhere, but we believe this is the best solution. In comparison to the incumbents, our onchain risk parameter approach with a public liquidation (to be made public in H2 2026) function is more similar Aave and Morpho than Hyperliquid and Binance.

The scenario in which the liquidation engine cannot recover enough USD is specifically, the scenario in which the risk parameters do not capture the materialized volatility and local liquidity of an asset listed on World. These risk parameters are responsible for managing this risk on World.

Aave has similar approach to risk and liquidations, i.e. it sets onchain parameters, which determine liquidation, and aims to ensure the user always has enough 'value' in their account to cover their risk.

But Aave is over-collateralized

We often hear the argument "but unlike Aave, World is under-collateralized." In reality, Aave allows users to leverage up in single positions with "looping" and Aave cross-margins collateral backing these leveraged positions in a "pool" - a risk World actually mitigates, see Market Structure. Hence, World and Aave have structurally comparable risk protections mechanisms. It's all a function of liquidity during liquidations.

But what about universal margin?

Universal margin already exists in traditional markets, and on CEXs (as "Portfolio Margin"), and even on exchanges with only spot and perps, such as Hyperliquid, cross-margining unrealized pnl potentially links all users' portfolios as one saw on 10/10.

The core differences are that World: 1) allows users to lever up on spot through borrowing, 2) understands net market exposures (common in traditional markets), and 3) enforces bilateral counterparty risk instead of user-vs-exchange counterparty risk.

But what about 50x leverage on the basis trade?

50x leverage entering a market neutral portfolio is less leverage than Hyperliquid allows users to be naked long or short.

To the extent users can leverage up more - the question, again, becomes whether the loan is recoverable in an liquidation. Read more about lending and leverage here: Capital Requirements.

Risk Management

World sets 2 risk parameters for every asset:

1. Risk Price, a volatility parameter, and

2. Risk Slippage, a local liquidity and spreads parameter.

These parameters are then added together and entered into the margin calculation, as described in ATLAS Math: Risk Based Valuation.

If the sum of the above two risk parameters do not fully account for the materialized volatility and available local liquidity (available, over some duration) of an asset, for example, during a sharp market sell off where all the liquidity moves to the other side of the book, the liquidation engine will not be able to recover enough USD during the liquidation process. Consequently, the users holding this asset will be unable to fully pay their creditors, which will reduce the NAVs and subsequently the available margins of these creditors. If leveraged positions of this asset are widely held on World, it introduces risk beyond the holders of these positions. This is the real risk - specifically, the sum of the risk parameters should ensure there are no scenarios in which the liquidation engine cannot reclaim enough USD (or equivalent) to repay all creditors for positions of a given asset.

A subtle, but powerful property of World is that all risk settings are fully onchain and transparent. One can find them in the Stats section of the application. The below screenshot is of the test application, the values are not real. All users, at all times, can see the risk parameters and deterministically know all inputs and calculations with respect to possible leverage and possible risk taking on the exchange, for all users of the exchange. There is perfect verifiable and unprecedented information symmetry between World and all of its users, uniquely solving the agency problem (i.e. conflict of interest with the exchange) described in Unified Margin Risk Question above.

Needless to say, these parameters are set with the research and intention of never approaching scenarios which could introduce risk.

We believe perfect information symmetry of the risk parameters of WCM will naturally evolve these parameters to an efficient market outcome, which maximally benefits its users. At the margin, one would expect to see additional capital arrive on WCM with incrementally better parameters, and conversely capital leave with incrementally worse parameters, iteratively working towards the settings which attract the most capital.

Moreover, every user has perfect insight into the portfolios of their counterparties at all times. Traders are then able to navigate counterparty risk dynamically, eliminating the need for "ADLs" near ubiquitous in other perps markets. Read Liquidation & No ADLs to learn more.

Circuit breakers and multiple price sources protect traders from 10/10-like scenarios.

Liquidations: Liquidity and Incentives

It should be clear from the above descriptions that this risk is a function of market liquidity during liquidations. This introduces an attractive incentive for markets makers and liquidators. Traders, including the liquidators, are incentivized to monitor and maintain resting market orders a conservative distance from market price to "catch" large liquidations, and source liquidity from anywhere. These maker orders can be maintained in parallel to other strategies, while incurring a minimal increase in (opportunity) costs, which makes the risk/return of this strategy very attractive for this category of trader.

Remaining Concerns

We encourage risk and due diligence teams to come up with specific scenarios they are concerned with, which allows us to walk through and evaluate them.