What is collateral. How does Primex Finance solve the problem of excessive collateral?

Decentralized finance (DeFi) has become an integral part of the digital asset world, with both trader and lender increasing profits without having to deal with traditional banking to exchange value. It is a growing industry, but there are still limitations that are gradually being addressed by innovative products such as Primex Finance.

Primex offers a solution that allows lenders to bypass banks and borrowers to access liquidity without having to satisfy the needs of intermediaries. The protocol meets the needs of a world that is seeing a turn towards tokenized assets, as well as a sharper focus on advanced digital asset trading.

Over-collateralized DeFi lending platforms and decentralized derivatives

Unfortunately, margin traders face limitations when trading on CEX and even on decentralized derivatives platforms, the situation is not much better in the decentralized financial space.
In fact, spot trading with leverage is almost non-existent in the DeFi sector, as only a small fraction of trading platforms offer such services to users.

This phenomenon is due to the fact that almost all DeFi lending protocols use over-collateralized loans to protect lenders from defaults and borrowers who do not pay. However, the inability to borrow more (or even as much) as the initial deposit makes over-collateralized lending unsuitable for margin trading, as traders often use leverage that is several times the initial margin. In other words, margin traders also cannot be borrowers in DeFi.

At the same time, several DEXs with margin trading capabilities are becoming increasingly centralized (they are no more than semi-decentralized). Although they are run by their communities, do not require KYC and use smart contracts to balance users, the execution of trades is centralized due to the presence of order books that everyone on the platform must trust.

In addition, like CEX, DEX also offer margin trading through crypto derivatives. And these instruments pose numerous challenges for traders:

1. As for decentralized exchanges, while they do not require KYC from their users, they equally have to comply with local derivatives-focused regulations that prohibit users in some jurisdictions from trading with leverage.
2. Despite the composed, chained and open nature of DeFi, margin trading on decentralized derivatives platforms is just as isolated as on CEXs.
3. Furthermore, while the demand for blockchain interoperability is high among DeFi users, the flow of liquidity is limited to individual chains, even on some of the most popular (dot-com) DEXs.
4. At the same time, most decentralized exchanges have limited trading interfaces that are simply not suitable for professional traders accustomed to the wide range of features offered by CEXs in the industry.

How does Primex Finance seek to solve the problem of excessive collateral?

Instead of derivatives, Primex offers margin trading on the spot market. This means that:

• Users do not need to undergo KYC checks to trade leveraged cryptocurrencies on the platform.
• Primex will not generate derivatives or offer any other derivatives-based services, making it much less likely to face regulatory compliance issues in the future.
• Traders who do not have access to digital asset-based derivatives due to regulatory laws (such as in the UK and the US) can trade leveraged cryptocurrencies on Primex without restrictions.
• Users have real and direct ownership of the digital assets they trade on the platform.
• As the community will continuously add new trading pairs and fund their pools with liquidity, traders will be able to access a wide range of cryptocurrencies on Primex.

At the same time, users can trade leveraged digital assets on Primex in a fully decentralized manner.

Solving the problem of overcollateralization by introducing scoring of traders based on artificial intelligence.

Based on historical data in the DEX chain and additional access to CEX’s trading history through a read-only API, Trader Notaries will use AI-powered tools to continuously assess each Trader’s performance and efficiency. Using sophisticated calculations and a wide range of factors, Credit Scores can determine the risk profile of individual Traders.

In the future, a high credit rating will provide access to under-deposited trading. In Standard Buckets, although positions are not over-collateralized as in DeFi’s general lending protocols, failure to meet maintenance margin requirements will result in the liquidation of the Trader’s position.

Primex v2 will introduce high risk credit buckets that allow trading with insufficient leverage for professional traders with high credit scores. As a result, traders will be able to keep their positions in the Bucket even if their unrealized losses exceed the initial margin.

The latter feature comes with higher costs and is associated with specific rules applied by smart contracts to protect creditors. In exchange, it allows Traders to achieve greater flexibility and potentially weather volatile market conditions by keeping open positions at or below the liquidation price for a period of time without facing Custodian action. In the event of liquidation of an under-collateralized position, Traders are incentivized to repay their debt to creditors, as failure to do so would significantly damage their scores and reputation (which they have worked hard to achieve).

Primex Finance thus addresses the existing challenges with a fully decentralized spot market margin trading protocol that can defragment the DeFi sector by leveraging the liquidity of multiple DEXs across multiple blockchain ecosystems.

By offering a platform to increase liquidity in blockchain markets and enabling cross-DEX trading, Primex will fundamentally change the way decentralized markets work.