As mentioned above, we never allow Alice's cash balance
to go negative, so Alice can only be underwater if , or, as mentioned above, if funding in kind forces Alice's short position size to exceed the number of NFTs she has as collateral.
Absent extreme divergence between index and mark price, which is possible depending on implementation, this should be a rare and foreseeable event, giving Alice plenty of time to recollateralize her account if necessary.
Of course, there is a tradeoff involved in this design choice: if the mark is above the index price when NFT-backed shorts are liquidated, the proceeds of those liquidations, which can take place at or even below the index price, may not be sufficient to cover the shorts' obligations, which are denominated in the mark price, and longs will therefore not get all they are owed.
This will present a major discrepancy only when the mark price is far above the index price, which should be a relatively uncommon occurrence in a well-implemented system. This is because, as demonstrated in the [Everlasting Options](https://www.paradigm.xyz/2021/05/everlasting-options/) paper, a perpetual future is equivalent via no-arbitrage to a basket of expiring futures, which are themselves equivalent via no-arbitrage to a basket of bonds and physical NFTs.
Regardless, if this tradeoff presents too great a risk, this feature can be removed at the cost of increasing the risk of NFT liquidations.