What is Collateral Based Trading?


Maintaining decentralization on a robust trading platform...

What is Collateral Based Trading?

The Overline interchange uses a new method of trading on its platform: Collateral Based Trading.

Collateral Based Trading on the interchange creates an incentive mechanism where makers and takers are both required to post collateral in the form of Overline tokens for their respective orders. Once both parties have posted their collateral, they are required to send their respective pair to the counter-party’s address in order to receive their collateral back to their address.

The same dynamics of putting a hold on a guest’s credit card during their hotel stay is at play in collateralization, as it ensures that both parties have incentives to perform their agreed upon roles. Collateral Based Trading incentives allow for trust-less trading to occur across different blockchains using Overline's multichain protocol.

Why Collateral Based Trading?

Overline collateralization is integral to the Overline network's ecosystem. The Overline collateral acts in place of previous points of trust, incentivizing both parties to behave properly. Think of this mechanism as the required infrastructure or circuitry that enables everyone to play fairly.

The way the collateral is settled and moves around with the orders is completely baked into the protocol. It requires no validation and no approval from any third party. Centralized exchanges or swap technologies use various methods to facilitate trading on their platforms, however these atomic swaps or oracle/validator-based solutions introduce vulnerabilities.

Collateralizing Overline enables users of the interchange to trade with their funds remaining in their full control, not in an escrow smart contract or with some other application, but within their own wallet the entire time.

Collateral is the only truly decentralized way to trade from two chains between two peers.

Can the total amount of collateralized Overline be less than the value of my order?

Yes, but whether it is accepted is entirely based on the risk appetite of the market for Overline. This in effect creates a price indicator for Overline which means that there will be less Overline for sale when the crypto markets in general are experiencing high levels of volatility. A user who sees a market rate pair may be disincentivized from accepting an open order if there is no guarantee they will get at least their amount of the trade back in collateral if the trade isn’t executed.

Where can I read more information on Collateral Based Trading?

Read more about Collateralization of Overline here.