Ethfinex allows trading participants to use third party peer-to-peer financing from other participants on the platform to trade digital tokens. Financing recipients may obtain financing in one of two general ways:
1. They may place bids for financing on the Financing Order Book;
2. They may elect to be automatically matched through the site’s order matching engine with one or more Financing Providers on the Financing Order Book, at the best prevailing price on the Financing Order Book.
Although Ethfinex is not a party to these financing contracts, Ethfinex enforces the contracts established between Financing Providers and Financing Recipients on the Financing Order Book.
The Financing Order Book operates independent of the Trading Order Book. Once the desired financing is secured by a Financing Recipient, both financed and unfinanced transactions on the Trading Order Book are indistinguishable from each other to the trade matching engine.
The amount of the financing, the term of the financing, and the interest rate are all commercial terms negotiated through the Financing Order Book between Financing Providers and Financing Recipients. For instance, assume that A has $30.00 (in dollars) in her account on the Site. A obtains $70.00 in financing at X interest rate for Y term on the Financing Order Book (thereby becoming a Financing Recipient) from B, a Financing Provider. With that aggregate amount of $100.00, A may purchase $100.00 in Ether on the Trading Order Book from C, or from one or more other sellers. A has the right to repay the financing (including any accrued interest) at any time without pre-payment or other penalty. Obtaining financing does not create any obligation to purchase Ether on the Trading Order Book. A may also replace financing from B at any time with more favorable financing.
In the above example, the Ether purchased by A ($100.00) are subject to a Lien in favor of B up to the total amount of financing secured from B ($70.00 plus any interest component). A may remove any amount of Ether from the Site that is not subject to the Lien. If the Financing Recipient’s equity falls to or below 15%—calculated as the quotient (expressed as a percentage) obtained by dividing (a) the excess of (i) the market value of the purchased Ether over (ii) the total principal amount (plus accrued and unpaid interest) relating to all financing outstanding by (b) the market value used in (a)(i), above—Ethfinex will force the liquidation of the Ether in A’s account without notice to A, return financing to the Financing Provider, with accrued interest, and return the balance to the Financing Recipient. Ethfinex does not make margin calls. For example, if the purchased Ethers' value falls from $100.00 to $82.35, the difference between that value and the financing obtained by A would be $82.35 – $70.00, or $12.35. Taken as a percentage of the Ethers’ value, $12.35 ∕ $82.35 equals 15%. In other words, if the value of the Ether fell to $82.35 in aggregate, A’s Ether would be liquidated by Ethfinex on the Trading Order Book, B would be repaid, and any remaining difference ($12.35, exclusive of interest) would be A’s to retain.
As set out in the Terms of Service, you grant Ethfinex agency to implement, levy, monitor, and maintain any and all Liens in favor of Financing Providers and to force-liquidate any Digital Tokens in your name or control on the Site if necessary to ensure that any Financing Provider on the Site from whom you have obtained financing is repaid in full. As set out in the Terms of Service, trading markets in digital tokens can shift quickly. Price movements can be unexpected. There is no guarantee against losses on the Site. You may lose more than is in your various wallets on the Site if you engage in financing on the Site. You are responsible for any trading and non-trading activity on your Ethfinex account, but Ethfinex must at all times retain the ability to protect Financing Providers by force-liquidating your account, as and when necessary. Ethfinex cannot guarantee to stop losses even with the ability to force-liquidate any of your positions (due to, for example, market volatility and liquidity). Ethfinex will not be and is not responsible for any Financing Provider losing funds or Digital Tokens to any Financing Recipient on Ethfinex.
If the market value of Ether rises, A may sell her Ether and repay the loan. For example, assume the value of A’s Ether rises to $115.00. Now the difference between the Ethers’ value and the financing is $115.00 – $70.00, or $45.00. Taken as a percentage of the value of the Ether, $45.00 ∕ $115.00 equals approximately 39%. Accordingly, A could remove part of her equity, but may not fall below her initial equity requirement. A could also sell the Ether on the Trading Order Book, repay the financing to B (plus any interest), and retain the balance on the transaction.
Alternatively, A could satisfy the Lien and unencumber the Ether by repaying the financing used to purchase the Ether. Unencumbering the Ether simply refers to the process of using some combination of unrealized gain or additionally deposited funds, or both, for the purposes of paying off the financing and removing the Lien. In the above example, A could deploy the unrealized gain of $15.00 to partially unencumber the Ether owned by her, thereby reducing the financed amount outstanding to B.