The status quo of futures instruments

Leverage is conventionally achieved through margin trading. The simplest instance being: the trader borrows some cash, with some margin as collateral, to buy more of an asset than could be bought with the margin alone. If the price of the asset rises, selling the asset position leaves the trader with a profit, after repaying the loan. If the price of the asset falls, the asset position has to be sold before its loss in value is greater than the margin, otherwise the loan will be in default.

In case the price does start falling, there is no guarantee the asset position can be sold at a sufficiently high price to cover the loan repayment, as usage of spot liquidity is competitive. The higher the leverage ratio, the lower the amount of margin, so the smaller the downward price move which puts the loan in default.

This also limits the leverage ratio: if the threshold downwards price move is too small, it is infeasible to sell the asset position before the loan gets into default. Derivatives such as perpetual futures offer the same P&L to traders as margin trading through borrowing, and as such have the same limitations.

The InfinityPools breakthrough

InfinityPools solves these problems by securing beforehand the spot liquidity needed to unwind the leverage. Leverage is created out of a loan of concentrated AMM liquidity. Conceptually, the trader borrows a liquidity range from a public pool, to put in their “private pool” which only they can execute swaps on. This liquidity is chosen to guarantee that the leveraged asset position can be sold for the exact amount of borrowed cash. Moreover, as a liquidity range has reserves backing it, borrowing liquidity implies borrowing the cash needed to buy the leveraged asset holdings in the first place.

On InfinityPools, no liquidation occurs in response to the spot price falling. Since the “private pool” holds liquidity for the duration of the loan, the asset position can be sold there just prior to repaying the loan, irrespective of how low the spot price has fallen to in the meantime. In addition, the trader can decide whether to use their “private pool”, or any other decentralized exchange offering a higher price, to swap the asset position for cash to repay the loan. As such, no price oracle is used. With no external dependence on a liquidation bot, nor price oracle, the protocol is entirely autonomous and so permissionless.

Last updated