Predefined TP/SL
Last updated
Last updated
In existing futures markets, a long position's counterparties (typically makers) carry an infinite risk. In other words, the margin required for a short position is theoretically infinite. They take a margin from the short position holder to address this issue. And if the margin is insufficient, additional deposits may be requested (known as a margin call), or forced liquidation may occur. If forced liquidation fails and results in a larger amount of loss than the margin, the brokerage firms or exchanges bear the loss and may later seek redress from the position holder or may have to cover the loss through an insurance fund.
Therefore, KYC and KYB are required to fulfill the payoff of the futures contract, and a trusted 3rd party, such as a court, or police, is necessary.
Chromatic Protocol introduces a predefined TP/SL, that enables the execution of payoffs solely through smart contracts without KYC, KYB, and trusted third parties. With predefined TP/SL, takers are required to set their take-profit/stop-loss levels in advance when opening a position. This means that the parameters for potential profit and loss are predetermined and agreed upon before executing the contract.
Within the predefined TP/SL mechanism, the stop-loss becomes the required collateral that takers provide, and the take-profit becomes the required margin that makers provide. Otherwise, someone would need to be watching the margin and potentially request additional collateral or enforce forced liquidation, which is an inefficient approach.
In the existing futures markets, the stop-loss level set by a taker is not fully guaranteed. The advantage of predefined TP/SL is that it allows accurate and complete execution of take-profit and stop-loss levels solely through smart contracts without the need for KYC/ KYB and a trusted third party. Also, margin calls or forced liquidation, and related penalties are not needed. With the predefined TP/SL mechanism, takers can set their take-profit and stop-loss level at will and pay the margin and fees accordingly. Also, they don’t have to lose sleep over worries about forced liquidation. From the makers' side, they only need to provide margins corresponding to the takers’ take-profit level, leading to increased capital efficiency.
The key features of Chromatic Protocol's predefined TP/SL are as follows:
The taker's take-profit becomes the margin for the maker:
Maker Margin = Contract Qty * Take Profit Ratio
The taker's stop-loss becomes the margin for the taker:
Taker Margin = Contract Qty * Stop Loss Ratio
Take-profit and stop-loss updates occur under the following conditions:
When the keeper detects an update in the oracle price.
When takers close their position.
Once a take-profit or stop-loss is confirmed, the following actions take place:
The takers’ remaining collateral and PnL are transferred to their accounts.
The remaining collateral and PnL of the makers are reflected in the liquidity bin's ledger and CLB token value of the bin.
Detailed information about the settlement is provided in the Settlement section.
