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Taoshi Documentation

Collateral Rationale

With the advent of the EVM on bittensor and the transition to real position sizing on PTN, we will be introducing a collateral requirement for miners.

Rationale for a Collateral Requirement

Collateral is generally required to secure a loan. With that logic, proprietary trading firms have been requiring traders to post collateral on the capital that the firm supplies in order to trade.

There are four primary purposes for posting collateral:

  1. Risk Management
    1. Protection against losses: Collateral buffers the firm from downside losses.
    2. Margin requirements: Collateral acts to cover any margin requirements.
  2. Alignment of Incentives
    1. Risk sharing: The more collateral a miner can put up, the more it shows that they are willing to assume risk.
    2. Minimizing moral hazard: Collateral aligns the incentives of miners with PTN. Miners who risk their own capital (via collateral) are less likely to take reckless or overly speculative positions compared to those who are trading without personal financial exposure. Unlike the sunk cost of a registration fee, collateral can be recovered if a miner maintains good performance. Accordingly, the promise of returning the collateral to the miner aligns the miner’s behavior with that of the overall system, potentially reducing the risk of harmful strategies being attempted.
  3. Capital Allocation, Margin and Leverage
    1. Capital-to-Collateral Ratio: Posted collateral will be directly linked to the amount of capital allocated in USD. In other words, there will be a managed capital-to-collateral ratio.
    2. Margin: Margin trading allows miners to leverage capital to potentially generate larger profits by depositing only a fraction of the full value of a trade.
    3. Leverage: Leverage is the reciprocal of margin. For example, 20% margin is the same as 5:1 leverage. As stated above, collateral will cover margin requirements so in this example, collateral will be greater than or equal to the 20% margin.
  4. Regulatory Compliance

In some jurisdictions, proprietary trading firms are subject to regulatory requirements that dictate the use of collateral to ensure financial stability and limit systemic risk.

Forthcoming Details and Timeline

In the next couple of weeks, we’ll provide details on how we plan to test the implementation of collateral on the EVM. We’ll also provide details on the flexible collateral amounts, the capital-to-collateral ratios, margin and leverage.