Liquidity Weighted Margining

Liquidity weighted margining is a technique where the cost of borrowing or the margin requirement is adjusted based on the depth of the market for the underlying asset. If an asset has low liquidity, it is harder to liquidate, meaning the protocol faces more risk.

Therefore, the protocol increases the margin requirement for that asset to compensate for the difficulty of exit. This ensures that the protocol is not left with assets that cannot be sold without causing a massive price impact.

It aligns the cost of using the protocol with the actual risk the protocol assumes.