Unlimited Leveraged Trading Without Liquidation: InfinityPools | TKX Weekly
Trading with leverage in crypto is risky due to its high volatility, which can lead to long wicks and disastrous outcomes for traders with high leverage. To protect liquidity providers, liquidation is essential. Traders and lenders are effectively opponents; lenders want tight liquidation to protect their asset, while traders want loose liquidation to avoid getting rekt prematurely.
Recently, the new DEX, InfinityPools, has become popular for its innovation: offering unlimited leverage on any asset, without the need for price oracles or liquidations. This has successfully catered to both traders and lenders.
InfinityPools is a DEX that offers traders unlimited leverage without the need for liquidation or price oracles. It is a two-sided market, with both traders and LPs. LPs deposit their LP tokens into the protocol which traders can borrow from in order to go long or short.
Traders do not need to worry about liquidation, as their trades take place on a private trading pool contract. Upon closing their position, they can exchange their position on either the private trading pool or another AMM to repay their loan. The protocol is fully permissionless and does not require the use of price oracles.
How it Works?
Let’s use ETH/USDC as an example. In an ETH/USDC pool with a market price of 1000 USDC, a liquidity range of 900 USDC is established, and a liquidity provider provides 1000 USDC within this range and receives an LP token for it.
If a trader wants to go long on ETH, they can borrow the LP token, swap it for 1000 USDC, and buy 1 ETH. There are three possible outcomes:
A. Price of ETH > $1000 — the trader makes money and can swap back a portion of the 1 ETH for 1000 USDC to pay back the LP token.
B. $900 < price of ETH < $1000, for example, at $901 — the 1 ETH the trader has is worth 901 USDC, but they need to return the LP token worth 1000 USDC to the liquidity provider. This means the trader must provide collateral of 99 USDC (~0.11 ETH) to pay back the full LP token.
C. $900 > price of ETH — the trader needs to return an LP token worth 1.11 ETH (in Uni V3, it will convert all the asset into ETH when out of the lower range), but they already hold 1 ETH. So they need to acquire an additional 0.11 ETH, which is worth about 100 USDC at most. In this scenario, the trader must have 100 USDC or 0.11 ETH as collateral to cover the payment.
Here we can see to borrow an LP token worth 1000 USDC at the 900 USDC liquidity range, a trader needs to put 100 USDC in collateral, which equals 10x leverage. The closer the liquidity range is to the market price of ETH, the higher the leverage. For instance, a liquidity range at 999 USDC allows for up to 1000x leverage and requires only 1 USDC in initial collateral.
InfinityPools use UniV3 mechanisms whereby LPs accept that when the price drops below a certain range all LP assets are converted to ETH. So, if the ETH price drops to $100 and 0.11 ETH is worth $11, traders only need to repay $11. This design significantly protects traders from losses.
If you look closer, you’ll notice that converting assets to ETH when the price is below a certain price is the same as a LP selling a put option. In InfinityPools, LPs enter a Sell Put/Sell Call position, while traders enter a Long Put/Call position if they want to go long/short on the asset. But why does the borrower (trader) payoff (blue line in the table above) appear to be similar to a call? This is because of Put-call parity. A combination of puts and leveraged long positions is equal to a call option.
A swapper is a tool used in InfinityPools that allows traders to borrow liquidity and swap tokens at a predetermined price. By borrowing tokens — such as ETH — from a pool, traders can exclusively swap them for the other token in the pool — such as USDC — at a fixed price. This eliminates the risk of liquidation and offers unlimited leverage for any asset.
The swapper merges liquidity from various ranges borrowed in one transaction into a single primitive. The tokens backing the liquidity range for a given swapper are called its reserves, and it has a single strike price at which token swaps can be performed for free, without any slippage or fees.
InfinityPools offers two types of loans: fixed-term and revolving:
- Fixed-term loans are for lower leverage trades (1x-40x) and offer lower borrowing costs. The interest is paid upfront for the loan term and the funds are paid according to the maturity schedule. Traders can also make a profit by swapping the borrowed assets back to the original LP assets.
- Revolving loans, meanwhile, are more similar to flash loans, and are for shorter-term, higher leverage trades (40–2000x+). These come with more choices, but at a higher cost. Interest is not paid upfront and traders can increase their collateral to pay future interest and retrieve remaining collateral by closing the loan.
InfinityPools’ Float Pool is designed for Liquidity Providers (LPs). If an LP’s liquidity range is not fully utilized by borrowers, the protocol stores it in the Float Pool for use in regular trades on Automated Market Makers (AMMs). Compared to other pools, the Float Pool offers lower costs and higher yields for LPs.
Unlike regular LPs, InfinityPools LPs benefit from both trading fees in the Float Pool and the funding rate paid by borrowers in exchange for liquidity. Profits in the Float Pool are only generated when the asset market price is within the liquidity range, while borrowed liquidity ranges are often away from the market price.
InfinityPools is a leveraged trading protocol that uses UniV3’s mechanism to protect traders from liquidation and safeguard lenders’ funds. It offers unlimited leverage on any asset, but lenders may have to bear some risks, such as holding worthless tokens at the conclusion of the lending period. This is especially relevant for less popular assets, which have limited liquidity and may limit InfinityPools’ usage. Consider these trade-offs before entering into any leveraged trading agreement.
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