Trading Module-Institutional Depth 📈

4.1 Trade Lifecycle

The trading lifecycle in HFDX is fully on-chain and deterministic:

1. Wallet Connection & Authentication — Users connect via EOA or smart wallet, ensuring transaction integrity.

2. Market Selection — Predefined risk parameters, including leverage limits, margin requirements, and asset eligibility.

3. Trade Submission via Router — Central execution gateway enforces atomicity of order placement.

4. Initial Margin Validation — Ensures sufficient collateral before position creation.

5. Liquidity Reservation — Allocates pool liquidity to back the leveraged trade.

6. Position Creation & On-Chain Recording — Smart contracts log all position parameters, including collateral, notional, and leverage.

7. Continuous Monitoring & Funding Accrual — Funding rates are applied continuously to maintain perpetual price alignment.

8. Voluntary Close or Forced Liquidation — Positions may be closed by users or liquidated based on maintenance margin thresholds.

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4.2 Margin & Liquidation Mechanics

Initial Margin (IM):

$$IM = \frac{\text{Notional}}{\text{Leverage}}$$

Maintenance Margin (MM):

$$MM = \text{Notional} \times \text{Maintenance Ratio}$$

Liquidation Condition:

$$\text{Equity} \leq MM$$

Liquidation Price (Simplified Long Position):

$$P_{\text{liq}} = \text{Entry Price} \times \left(1 - \frac{IM - MM}{\text{Notional}}\right)$$

These formulas quantify the risk envelope for each trade and allow predictable liquidation mechanics, essential for institutional risk management.

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4.3 Funding Rate Model

Funding rates align perpetual prices with the external spot index:

$$\text{Funding Rate} = \text{Clamp}\left(k \times \frac{\text{Mark Price} - \text{Index Price}}{\text{Index Price}},\ \text{Min},\ \text{Max}\right)$$

Where:

• k — Dampening coefficient controlling rate sensitivity

• Min/Max — Thresholds that prevent extreme capital outflows during volatility

Funding is applied periodically, creating a self-correcting mechanism that stabilizes the perpetual market.

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