Margin Collateral Risks

Context

Seablocks utilizes both linear and inverse margined perpetual futures in its hedging strategies. Linear perpetual futures are denominated in USDT, meaning that both margin requirements and PnL calculations are quoted in USDT. This results in an implicit long exposure to USDT whenever it is used as the quote currency for collateral.

For example:

If Seablocks posts BTC as margin collateral and takes a short position on a BTC/USDT linear perpetual future, it achieves a delta-neutral position in BTC (long spot, short futures).
However, because the contract is denominated in USDT, the protocol effectively takes a long USDT exposure without a direct offsetting hedge.

This introduces systemic risk in the event of a USDT-specific failure or devaluation.

USDT Exposure Risk

Currently, approximately 80% of open interest in perpetual futures across major exchanges is stablecoin-margined, with the majority of those contracts quoted in USDT. This widespread usage makes USDT the primary quote currency for derivatives markets but also concentrates risk.

Seablocks closely monitors the stability of USDT, including:

Price deviation risks that could indicate instability.
Solvency concerns related to issuer transparency and reserve backing.
Regulatory pressures that could impact Tether’s banking relationships or liquidity.

Risk Mitigation Strategies

To manage margin collateral risks, Seablocks employs multiple strategies:

Dynamic Contract Rebalancing: In the event of persistent concerns over USDT, Seablocks would gradually shift perpetual futures positions from linear USDT-margined contracts to inverse BTC- or ETH-margined contracts, reducing reliance on USDT.
Active Monitoring & Adjustments: Seablocks continuously evaluates the liquidity depth of inverse-margined contracts to ensure smooth transition if needed.
Diversification of Margin Assets: The protocol strategically distributes margin collateral across different asset types to mitigate single-asset dependence.

By proactively addressing margin collateral risks, Seablocks maintains the integrity of its hedging positions while ensuring resilience against potential systemic stablecoin disruptions.

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Last updated 1 month ago

Context

For example:

If Seablocks posts BTC as margin collateral and takes a short position on a BTC/USDT linear perpetual future, it achieves a delta-neutral position in BTC (long spot, short futures).

However, because the contract is denominated in USDT, the protocol effectively takes a long USDT exposure without a direct offsetting hedge.

This introduces systemic risk in the event of a USDT-specific failure or devaluation.

USDT Exposure Risk

Seablocks closely monitors the stability of USDT, including:

Price deviation risks that could indicate instability.

Solvency concerns related to issuer transparency and reserve backing.

Regulatory pressures that could impact Tether’s banking relationships or liquidity.

Risk Mitigation Strategies

To manage margin collateral risks, Seablocks employs multiple strategies:

Dynamic Contract Rebalancing: In the event of persistent concerns over USDT, Seablocks would gradually shift perpetual futures positions from linear USDT-margined contracts to inverse BTC- or ETH-margined contracts, reducing reliance on USDT.

Active Monitoring & Adjustments: Seablocks continuously evaluates the liquidity depth of inverse-margined contracts to ensure smooth transition if needed.

Diversification of Margin Assets: The protocol strategically distributes margin collateral across different asset types to mitigate single-asset dependence.

By proactively addressing margin collateral risks, Seablocks maintains the integrity of its hedging positions while ensuring resilience against potential systemic stablecoin disruptions.