Frequently Asked Questions
What is margin trading?
Margin trading has two main aspects: trading with leverage and shorting. In trading with leverage, a trader borrows assets to increase the amount of assets they are trading. By doing so, they magnify the gains or losses of their trade. The borrowed assets are known as a margin loan. To obtain the margin loan, the trader puts up assets that serve as collateral. The terms of the margin loan specify a collateral-to-loan ratio. If the trade falls below the specified ratio, the trade is liquidated and the lender is made whole using the trader's collateral.
Margin trading also includes shorting. In shorting, a trader essentially sells assets they do not own. The short investor borrows an asset and sells it on the expectation that the assets will lose value.
What is margin lending?
In margin lending, a lender lends funds to a margin trader who trades with those funds. The lender receives interest on the funds loaned out.
What are decentralized exchanges?
In centralized exchanges, a central party holds the private keys to your wallet and ultimately has control of your funds. In a decentralized exchange, smart contracts replace the centralized third party, allowing you to keep control of your wallet and funds.
What are the risks of centralized exchanges?
When you use centralized exchanges, you are exposed to custodial risk. Custodial risk is the risk you take when you allow someone to have control of the private keys to your funds. Centralized exchanges have three main risks:
- The exchange gets hacked.
- The exchange runs away with your funds (an “exit scam”).
- A regulatory crackdown causes your funds to be frozen or unaccessible.
What sort of interest rates can I expect as a margin lender on a centralized exchange?
Market rates on centralized exchanges, when accounting for compounding interest, often reach between 15–40% APR depending on market conditions and the asset in question.
What is global liquidity?
Global liquidity pools are when liquidity pools are shared between all of the different relayers and exchanges using the protocol. Exchanges are incentivized to host orders from other relays and exchanges and mirror order books to maximize the volume on the relayer exchange. bZx enables global liquidity pools.
What is Universal Liquidity?
bZx is creating a bridge between the liquidity pools of the centralized and decentralized exchange ecosystems. This is Universal Liquidity, which goes one step beyond global liquidity. Universal Liquidity bridges together the liquidity of all exchanges and relays.
How do the margin lending interest rates on decentralized exchanges compare with those of centralized exchanges?
On decentralized exchanges, you should expect similar interest rates as on centralized exchanges. However, the interest rates are likely to be slightly lower because centralized exchanges make traders pay a premium due to taking on custodial risk.
What are central counterparty clearing houses (CCPs)?
Central counterparty clearing houses are third parties that get between lenders and traders to pool risk. They function to net out liquidation risk: if any one trader fails to get liquidated, the damage is spread out across lenders so that the damage to any one lender is minimized. The central counterparty clearing house becomes the counterparty to the buyer and the seller and guarantees the terms of a trade even if one party defaults on the agreement. The central counterparty clearing house collects enough funds from each buyer and seller to cover a lender's losses if an agreement is not followed through.
What are deCentralized counterparty clearing houses (dCCPs)?
deCentralized counterparty clearing houses perform the same role as centralized counterparty clearing houses. But instead of being run by trusted third parties, they're run by trustless smart contracts.
Why are decentralized exchanges better for margin traders and lenders?
Decentralized exchanges are better for margin traders for the following reasons:
- You stay in control of your keys and keep your funds secure.
- Lower interest rates.
When you're lending money and your biggest risk is getting hacked — and that risk could mean losing all your funds — then it becomes a no-brainer to use decentralized exchanges.— Kyle Kistner, bZx co-founder.
How do I know I have control over my private keys?
If you don't know what your private keys are, you don't have control over them. When you open an account on a centralized exchange, they create a wallet for you and maintain the private keys. Examples of centralized exchanges include Coinbase, Bitfinex, Binance, Poloniex, and Bittrex.
In the bZx protocol, how do lenders and traders maintain control of their keys?
bZx replaces the third party who would normally hold lenders' and traders' keys with a smart contract. The smart contract doesn't need to hold lenders' and traders' keys.
How can an exchange use the bZx protocol to tap into Universal Liquidity?
Exchanges will list the interest-bearing versions, iTokens, of any token for which they would want to enable margin lending. They would need to configure their backend to correctly route token interest to the correct exchange account from the exchange wallet. By listing iTokens, the exchanges are able to tap into Universal Liquidity and offer much greater liquidity to their users.
What makes bZx secure?
bZx runs on an immutable, censorship-resistant, decentralized blockchain. bZx is composed of audited smart contracts that no third party can control, including the developers. The bZx protocol will be audited extensively by at least three leading smart contract security auditors.
What is an iToken?
An iToken is a token wrapped in a smart contract that enables the token to generate interest. To receive an iToken, you send your token into a smart contract and then that smart contract generates a token that represents that token but has slightly different functionality. The iToken is essentially an IOU. It is one-to-one redeemable for the parent token. By sending your token to the smart contract that creates the iToken, you're essentially sending your token off to work. Whenever you send in the IOU slip represented by the iToken, you're able to get back your original token. It's a lot like how banks pay you to let them loan your deposits out behind the scenes, but with smart contracts instead of middlemen. Welcome to the first unBank account. :)
What does the BZRX token do?
The BZRX token has two functions:
- The BZRX token is a governance token: holders get to vote on the direction of further bZx protocol development.
- BZRX token is a medium of exchange token used in the bZx protocol layer. It is used to pay trading fees. Specifically, it is used to pay maker and taker fees to the relays.
What is the SUGR token?
The SUGR token is used to pay bounty hunters and reimburse trading fees. There is no ICO of the SUGR token; it is distributed according to usage of the oracle. SUGR tokens are redeemable for a fraction of the Ethereum collected from the fees on interest taken from lenders.
How do people exchange their iTokens for their original tokens?
There are two methods to exchange iTokens for their original, non-interest bearing tokens:
- Send it back to the contract. Once whatever loan fulfilling is over, the token will be sent back to your address.
- Liquidate the iToken on the secondary market by using Kyber Network or another exchange.
Won't it be a hassle to deal with iTokens and regular tokens?
iTokens are just mechanics that are behind the scenes. bZx is working with the wallet providers to automate all the iToken exchanges so that users use them without ever having to interface with them. Essentially, using iTokens will be a checkbox that you check on your existing wallet to allow your tokens to generate interest (MEW, MyCrypto, Parity, Metamask, Mist, Jaxx, etc).
Is bZx an exchange?
No, bZx is a protocol that can be integrated into any (b)0x standard relay. bZx provides the backend smart contracts that power decentralized exchanges. bZx also provides a bridge to easily link exchanges' user interface to the bZx protocol.
What is the bZx Guarantee Fund?
The Guarantee Fund is a fund that is automatically dispersed to any lender who would have lost funds for any reason. The fund is collateralized half in ETH and half in BZRX token.