> ## Documentation Index
> Fetch the complete documentation index at: https://docs.ultramarkets.xyz/llms.txt
> Use this file to discover all available pages before exploring further.

# Margin vs Lending

> How Ultramarkets differs from traditional lending protocols and why that matters.

Ultramarkets is often compared to lending protocols like Aave or Compound. The mechanics look similar: users deposit capital, borrowers pay interest, there's liquidation risk. But the model is fundamentally different.

## Ultramarkets Is a Prime Broker

In traditional finance, a prime broker provides execution, custody, and financing to institutional traders. The broker doesn't take the opposite side of trades. It facilitates access to markets with borrowed capital.

Ultramarkets operates the same way:

| Function           | What We Do                         |
| :----------------- | :--------------------------------- |
| **Lend capital**   | For leveraged positions            |
| **Execute trades** | On Polymarket                      |
| **Hold custody**   | Of position shares                 |
| **Manage risk**    | Through liquidation and auto-close |

<Note>
  We're not a counterparty. We're infrastructure.
</Note>

## How Capital Flows

<Card title="The Lifecycle of a Leveraged Trade" icon="arrows-rotate">
  <Steps>
    <Step title="Deposit">
      Trader deposits \$1,000 margin
    </Step>

    <Step title="Borrow">
      Vault lends \$9,000 (10x leverage)
    </Step>

    <Step title="Execute">
      We execute \$10,000 position on Polymarket
    </Step>

    <Step title="Custody">
      Position is held in Ultramarkets custody
    </Step>

    <Step title="Close">
      Trader closes or gets liquidated
    </Step>

    <Step title="Recover">
      Vault recovers \$9,000 + fees
    </Step>

    <Step title="Return">
      Trader receives remaining equity
    </Step>
  </Steps>
</Card>

The borrowed capital physically moves to Polymarket and becomes outcome tokens. It's not sitting in a smart contract earning interest. It's deployed.

## Execution Risk vs Directional Risk

This distinction matters for understanding what LPs are actually exposed to.

<CardGroup cols={2}>
  <Card title="Directional Risk" icon="arrow-trend-up">
    Exposure to whether an event happens. If you bet Trump wins and he loses, you lose money.

    **Ultramarkets LPs have zero directional risk.** They don't care who wins.
  </Card>

  <Card title="Execution Risk" icon="gears">
    Exposure to whether positions can be closed cleanly. Can we liquidate before losses exceed margin? Can we exit before resolution?

    **This is what LPs are exposed to.**
  </Card>
</CardGroup>

<Info>
  Our entire risk management system (market selection, early liquidation, force-close) exists to minimize execution risk.
</Info>

## Why This Matters

### Lending Protocols (Aave, Compound)

* Face bad debt when collateral values drop faster than liquidation can execute
* The borrowed asset stays in the protocol
* Utilization affects rates

### Ultramarkets

* Faces bad debt when positions can't be closed profitably
* The borrowed capital leaves the protocol
* Utilization affects withdrawal availability, not rates

<Note>
  These are related but distinct risk models. Understanding the difference helps LPs evaluate what they're actually exposed to.
</Note>