> For the complete documentation index, see [llms.txt](https://elysia.gitbook.io/elysia-perps/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://elysia.gitbook.io/elysia-perps/risk-and-security/collateral-risk.md).

# Collateral Risk

Why a non-stablecoin collateral token is a second exposure: its market price can move independently of your trades.

Elysia Perps can accept a token other than a stablecoin as collateral, including a non-stablecoin token (see [Quanto Markets](/elysia-perps/introduction/quanto-markets.md)). Which token a market accepts as collateral, and the fixed rate it converts at, are **per-market** settings. The live Elysia Perps market uses EL. That flexibility comes with a risk that does not exist on a stablecoin-only exchange: the **price of your collateral token is a second exposure**, separate from your trades.

This is the most important thing to understand before trading with a non-stablecoin collateral token. The [Collateral](/elysia-perps/getting-started/collateral.md) page explains how the settlement unit works; this page explains the risk it carries.

## Two exposures at once

![Account value equals trade PnL plus the collateral token's own price move](https://1949530945-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FDKUIMv3mUd02iALaez0P%2Fuploads%2Fgit-blob-3e40d57f221feafb9776dd8346210002a3d9ea12%2Fdual-exposure.png?alt=media)

Inside the protocol, each collateral token is credited as its **own $1-denominated unit** (on the live markets, EL is credited as **EL$), and** that unit is treated as exactly 1 USD for margin, PnL, and fees.

Because the settlement unit is pinned to $1 internally (at a rate that is **set once and never re-pegs** to the token's live price), while the real token floats on the market, you hold two positions at the same time:

1. **Your trade**: your long or short on BTC (or whichever market), settled in the $1 unit.
2. **The collateral token itself**: the on-chain token you deposited, whose market price can rise or fall independently of how your trade performs.

```
On-chain:   you hold the real token  (price floats)
Inside:     credited as its $1 unit  (treated as 1 USD)
Your risk:  trade PnL  +  collateral token's own price move
```

If the collateral token's price falls, the real-world value of your collateral falls with it, even if your trade is flat or winning. If it rises, you gain on the collateral on top of your trade.

## Why you carry the token price risk

This is by design. The settlement ledger is denominated in each token's $1 unit and references the USD oracle directly, which keeps all trading math in dollars and lets the protocol support a volatile token as collateral at all. The trade-off is that the token's **price** risk is not absorbed by the protocol or socialized across traders. It is borne **by each participant** on their own deposited balance.

In short: the protocol isolates your *trading* math from the token's volatility, but it does not remove your exposure to the token you chose to hold.

## Stablecoin vs. non-stablecoin collateral

|                           | Stablecoin collateral               | Non-stablecoin collateral (e.g. EL)                   |
| ------------------------- | ----------------------------------- | ----------------------------------------------------- |
| **Collateral price risk** | Effectively none                    | You are exposed to the token's market price           |
| **What your PnL tracks**  | Pure dollar exposure                | Trade PnL **plus** the token's price move             |
| **Best for**              | Traders who want clean USD exposure | Holders of the token, or those who want that exposure |

If a stablecoin collateral option is available on your market and you want pure dollar exposure, use it. If you deposit a non-stablecoin token, do so knowing you are also taking a view on that token.

## How to manage it

* **Size positions with the token's own volatility in mind**, not just your trade's. A move in the collateral token affects your account value directly.
* **Withdraw or convert** if you want to step out of the token exposure between trades. Deposits and withdrawals use the same fixed per-token rate, so a round trip returns the same amount of the underlying token (see [Collateral](/elysia-perps/getting-started/collateral.md)).
* **Don't treat the $1 unit as a stablecoin.** It behaves like one *inside the protocol* for math, but on-chain you always hold the real, floating token.

## Where to go next

* How the $1 unit and the fixed conversion rate work: [Collateral](/elysia-perps/getting-started/collateral.md).
* The quanto model and the markets it enables: [Quanto Markets](/elysia-perps/introduction/quanto-markets.md).