Loan maturity

Exponential maturity

Loans of liquidity ranges (swappers) on InfinityPools mature on a continuous basis, with the same proportion of the position maturing in each instant. The amount of loan outstanding is therefore an exponential function of time. If a trader borrows 1 USDC for example, once some time t has elapsed since borrowing, the USDC still on loan will be 2t2^{-t} with t measured in days, which is the exponential eλte^{-λt}with λ=ln(2)λ=ln(2).

Replenishing process

InfinityPools traders have the option, and not the obligation, to replenish the holdings that have decayed at a new, current, interest rate. This replenishing process is how a trader's position size can stay constant.

In the original example, the trader borrows an LP token worth 1000 USDC (loan notional), redeems it and converts all of the USDC to get 1 ETH long exposure (trade notional). In practice, on InfinityPools, a trader looking to go long 1 ETH would instead borrow a bit more (~9% for InfinityPools v1, so about 1090 USDC) and convert 1000 USDC to 1 ETH.

As the loan matures and gets closer to 1000 USDC in notional, the trader would "replenish" by borrowing new USDC to reset their loan notional at 1090 USDC. That way, despite the loan notional expiring, they can keep their exposure to ETH constant and replenish before the loan notional drops below the trade notional.

Estimated time left

As the loan matures, if the price hasn't moved, the trader gets back their margin but not the interest paid. To replenish their position the trader must therefore use their unlocked margin to borrow more and use a part of it to pay a new interest rate. With each replenishment, the interest rate payment eats into the margin while the position notional stays constant, thereby increasing the leverage.

This happens repeatedly, until there is not enough margin left to pay the interest rate, at which point, the loan stops replenishing and the trade starts unwinding. The "estimated time left" field displayed on the InfinityPools UI refers to how many times this replenishing can happen if the price doesn't move.

Of course, if the price moves against the trader, their margin would go down to 0, accelerating the unwind process. Similarly, it the price moves in favor of the trader, the unrealized gains can be used to lengthen the replenishing process.

Parallels with perpetual futures' maturity

This replenishing of the trader position is in fact, implicitly, how perpetual futures maintain a constant position over time. If the future did settle, this would leave a long position holder with the futures’ underlying asset.

To recover their position, the long holder would have to sell the asset, at spot price, and buy more future, at its mark price. The difference of mark price minus spot price is exactly proportional to the funding rate which long perpetual positions pay continuously. Therefore the funding rate corresponds to the continuous settlement and forced replenishing of the position, which net out to keep the position constant over time.

In order for traders to make bets on the direction of spot price moves, perpetuals’ implicit settlement at spot is required. The forced replenishing of perpetual positions is problematic however, as it makes the P&L of perpetual trades dependent on the perpetual market itself, unlike a proper derivative. This is the cause of dysfunction observed in perpetual markets, most crucially perpetual P&L failing to track the spot market (not even tracking the “same” perpetual on other venues in fact), due to often double digit, and sometimes triple digit funding rate APRs.

Benefits of the InfinityPools loan maturity profile

InfinityPools avoids the aforementioned problems by making replenishing of the trader position entirely optional. Traders can set an interest rate tolerance that allows them to continuously exit their position without slippage while the interest rate is above their indicated threshold, and replenishes the position notional when it is below.

For example, if a borrower doesn’t want to pay more than 10% APR on their loan, they can select 10% as the threshold interest rate tolerance. The loan will automatically unwind exponentially when the APR goes above 10% and will grow its notional back to the original level when the APR goes below 10%.

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