USD vs USDC
Bluefin uses USDC.e (bridged USDC) as the primary collateral for the positions on the exchange. This article explains the relationship between USD-denominated instruments and USDC.e margin on Bluefin and how the risk engine functions in the event of a USDC depeg from USD. Throughout the article, USDC is assumed to mean USDC.e.
USDC is a fully collateralized stablecoin managed by Circle, a US-based company. Circle accepts USD and mints USDC in exchange at a 1:1 ratio. USDC has maintained a stable price around $1 since its inception, but it is essential to understand how Bluefin would function if the USDC price were to diverge from $1.
Collateral on Bluefin is held as USDC, and the notional value of positions is measured in USDC. When users set their order size, the notional value of their position is calculated as (asset order size) * (asset price in USD) in units of USDC. Bluefin does not have price feeds for USDC and does not track the USDC price in USD by design.
In the event of a USDC depeg from USD, Bluefin will continue to function as normal. However, all user positions, collateral, funding payments, and the insurance fund will be worth less in USD, proportional to the change in the USDC-USD price. Leverage and liquidation status will not change due to USDC-USD price changes.
Consider a user opening a position with an order size of 1 BTC when the price of BTC in USD is 10,000. The starting notional value of the position is 10,000 USDC. If the price of USDC falls to 0.5 USD, the position in USDC remains 1 * 10,000 USDC, but the notional value of the position in USD drops to 5,000 USD.
If the user had opened the position using 2x leverage (using 5,000 USDC as collateral), when the price of USDC in USD falls to 0.5, the value of the collateral in USD falls to 2,500 USD, and the notional value of the position in USD falls to 5,000 USD. The user remains 2x leveraged in USD and USDC terms, as USDC-USD price changes do not affect user leverage or liquidation status.
Bluefin uses USD price feeds as oracles, ensuring that funding rates push markets back toward USD prices. There is no fundamental reason for prices to diverge significantly, as Bluefin's perpetual market is based on the asset/USD price, with positions margined and sized in USDC.
In the event of a USDC depeg, funding rates will continue to be paid as usual, calculated based on the notional size of open positions (measured in either USD or USDC) and proportional to the divergence between the perpetual price and the oracle price.