Payoff

While InfinityPools traders feel as though they are margin trading with no liquidations, the payoff is that of a synthetic in-the-money (ITM) option. InfinityPools traders create this payoff by initiating a margin trade and buying an out-the-money (OTM) option with a strike at the margin trade’s hypothetical liquidation price. The OTM option's notional and maturity both match the margin trade’s.

Let’s imagine a trader is looking to long ETH/USD on InfinityPools with 10x leverage and the current market price of ETH is 1000 USD:

1. The trader would start by borrowing USD and buying an OTM put option with a strike price of 900 USD since 10x leverage means a hypothetical liquidation price of 10% below market price:

2. Swapping the borrowed USD for ETH (using any spot exchange) would then initiate the margin trade and create the desired synthetic ITM call option payoff:

As you can see, the synthetic ITM call option payoff is very similar to that of a regular margin trade but without liquidations. Terminating the margin trade would convert the payoff function back to the OTM one. This ability to switch back and forth at will between in/out-of-the-money allows traders to lock in profits at any time and immediately realize the value of their position in USD, at any time before loan and option maturity.

Additionally, if InfinityPools doesn't have enough liquidity for an OTM option at the given strike (green line below), it automatically combines OTM options at different strikes (red and grey lines below) to recreate the desired payoff for the lowest available premium.

This new synthetic OTM option (purple line below) also works for the trade above as it has a strictly better payoff than the initial OTM option (green line below).