How to trade leveraged on DEX?
Leveraged trading is an important trading model in both the traditional financial sector and the emerging DeFi market, and a financial tool that professional investors are keen to use. As evidenced by the rising number of leveraged trades on most centralized exchanges, aggressive crypto asset traders are willing to take on the high risk associated with high leverage in the pursuit of higher returns.
However, for the crypto market, especially the DeFi market, the only identification credential for traders on the chain is only a string of code, and it is difficult to assess the user’s assets and credit status, so it is difficult to adopt the credit lending model in traditional finance, which leads to the fact that leveraging in DeFi lending activities usually requires collateral as a guarantee. Currently, Lending Protocol is unable to finance excess lending, i.e., it is unable to increase leverage above 1x.
Leverage in DeFi
The logic of leveraging through crypto asset lending is very simple. Assuming that the user holds AVAX worth $1000 and is bullish on AVAX at the same time, then in order to earn more income, users can deposit the AVAX held on platforms such as Compound or Aave as collateral, and borrow $600 worth of USDC and other stability Currency assets, and then exchanged for $360 AVAX through a decentralized exchange. Currently, the user is equivalent to using an initial capital of $1000 to invest in encrypted assets worth $1960.
If the price of AVAX moves as expected and rises 20%, due to the leverage gained through borrowing, then the user will gain $1000*20% + $360*20% = $272 profit (before excluding DEX transaction fees and borrowing interest from the lending platform). If there is no leverage, the user will only get $1000*20%=$200 profit.
If users are short on AVAX, they can choose to borrow AVAX on the DeFi lending platform, and then exchange it for stablecoins on DEX. If the price drops, users can use stablecoins to buy AVAX at a lower price in the market, and after repaying the debt of AVAX in the lending platform, the remaining price difference will be the profit obtained by users shorting.
However, if the market fluctuates in a direction unfavorable to one’s position, the trader may be unable to repay the borrowed funds due to the volatility of the asset price. To prevent this, the lending platform will liquidate the trader’s position before reaching a certain liquidation ratio. This is the side of lending leverage that acts as a double-edged sword.
Intertrust’s survey results show that hedge funds are expected to invest 7% of their assets, equivalent to $312 billion, in the cryptocurrency market within five years. Among them, leveraged trading will be an important investment tool for professional investors. However, the current lending and trading protocols are not yet well integrated.
From the aforementioned operation, the whole process is not only cumbersome for users who want to trade with leverage on DeFi, but also difficult for investors to centrally manage their positions in leveraged trading, pushing up the transaction cost and risk for users. More importantly, none of the existing DEX products allow users to borrow directly for leveraged trading, i.e., they cannot go long or short a crypto asset.
Empower DEX with leveraged trading
One-stop lending and user demand for leveraged trading gave birth to Vee.Finance. As a decentralized cross-chain lending platform for traditional financial users and cryptocurrency users, Vee.Finance takes advantage of the combinable features of DeFi and integrates the liquidity of DEX to effectively integrate the lending protocol and transaction protocol, and it allows traders to directly Perform leveraged transactions.
On the Vee platform, if you hold ETH but do not want to sell in the short term and are strongly bullish on AVAX, you can supply $1,000 ETH worth of collateral into Vee and borrow stablecoins for $600 AVAX worth of collateral, and if the price of AVAX moves as expected and rises by 20%, you will earn $120 (before interest on the borrowed funds), the rate of return is 12%. If you use 3x leverage on this trade, the yield would be 36%.
Vee chose to build with Avalanche because the transactions on Avalanche are more secure and faster compared to projects on Ethereum, and the low gas fees make it beneficial for users with small amounts of capital to participate in DeFi leveraged trading. In addition, users who participate in leveraged trading can not only earn profits through trading strategies, but also liquidity mining rewards.
In terms of funding depth, Vee has entered into a strategic partnership with decentralized exchange Ponglin and will introduce other external DEXs in the future. in addition, Vee intends to go live with a limit pending order feature, which will generate all or part of a user-specified number of trades by traversing all of its integrated DEXs with matching limit orders through Vee’s algorithmic matching.
At present, there are also some decentralized exchanges using the order book model, such as dYdX. Due to the performance limitations of the Ethernet network, these order book exchanges can only use the off-chain order book and on-chain settlement to conduct transactions; in addition, the traditional order book model naturally limits the injection of external idle assets, and dYdX only has a small number of trading pairs, so the liquidity is far from satisfying the diverse investment needs of users and cannot motivate more users to participate in trading. It is unable to motivate more users to participate in trading.
The transaction method on the Vee pure chain makes the transaction more transparent, and traders can freely access the relevant blockchain records approved by the Avalanche verifier. Different from the self-built liquidity of platforms such as dYdX, Vee’s advantage lies in the integration of external DEX, making full use of the market depth and liquidity of different DEX to meet the trading volume needs of traders at different levels.
In addition, in terms of security, the new version of Vee’s smart contract code has been submitted to SlowMist for audit, and the platform has also improved security by strengthening the underlying contract and vulnerability reward programs. In terms of trading experience, Vee provides a convenient interactive design on the supply, borrow and trading interface. Users can set stop-profit and stop-loss points and automatic settlement cycles to manage their leveraged positions.
Since Beta began on July 10, Vee has received an overwhelmingly positive reception from the community, with the total number of users now surpassing 11,000 and close to 10,000 unique wallet addresses. Building on this momentum, Vee will be launched on the mainnet soon. Join the Vee community to get live updates about the project!
