Bitfinex offers three main functions with three different types of wallets which work together.
The exchanging of Bitcoins works like any regular Bitcoin trading platform by placing your offer to buy or sell Bitcoins in the orderbook. When one order is matched against another, the order is executed. The Exchange Wallet is used for this feature.
Our margin trading feature allows you to borrow funds from peer liquidity providers (see next feature) to trade Bitcoins. You are always responsible for the accrued interest, at the rate in effect for the loan(s) involved in each position you take. For example, let's say you want to open a long position for 10 Bitcoins. That means you want to buy 10 Bitcoins hoping the price will go up. The system will borrow for you 10 * the price of Bitcoins in US dollars (let's say 1300 USD, 10 * $130) from liquidity providers, at the best rates available. When you close your position, you will reimburse the 1300 USD USD plus the interest that has accrued. Interest fees are added to your balance once per hour. There are two ways to pay back interests of margin positions (the "Swap type"):
At any time, you can close your position. This will reimburse your lender, and your position will be settled either at a profit or a loss, according to the price you close your position at. The same goes for short position (selling Bitcoins), where you borrow Bitcoins instead of dollars. If there is no lender available, you will not be able to open a position. Your order status will be cancelled with a status indicating "NO RESERVE".
The trading wallet is used for margin trading. It does not serve the purpose of buying or selling Bitcoins, it serves only maintenance margin; that is, even if you have 1000 US dollars in this wallet, if you open a 10 BTC long position, you will borrow the needed USD. Funds in this wallet are to cover for eventual losses that may occur. When the losses cover almost all your wallet balances, you may get a margin call and have your position force-closed to avoid further losses.
Our liquidity feature goes hand in hand with the margin trading feature described above. If you are not a trader and prefer safer investments, this feature is for you. Bitfinex allows you, using your deposit wallets, to provide liquidity in the form of Bitcoins and/or dollars to traders. You can enter offers with your own chosen terms (return rate, duration, and amount). When an offer is taken by a trader, the money in your wallet will be used to buy or sell Bitcoins, and a CFD (credit) will be opened. When the position expires (the trader closes his position), Bitcoins are bought or sold back and the money is returned to your wallet.
You are not exposed to exchange risk when you lend with Bitfinex. The exchange risk is taken on by the trader, and, in case his position loses money, he will cover the loss with funds in his trading wallet.