Leverage LP
Last updated
Last updated
Leveraged Liquidity Provisioning empowers users within the Elys Network to take control of their investment strategies by allowing them to amplify their liquidity positions using borrowed funds.
Leverage involves using borrowed capital to increase the potential return of an investment. In the context of leveraged liquidity provisioning, leverage LP allows users to use their liquidity pool positions without needing to provide the entire asset amount upfront.
By borrowing extra assets, allowing them to engage in larger pools and earn greater returns from trading fees and rewards without needing to provide the entire asset amount upfront. Leveraged liquidity provisioning offers a range of benefits, including the ability to control larger positions than their actual capital would allow, optimizing the use of their funds. By leveraging assets, users can free up capital to invest in other opportunities, making their investments more capital-efficient. Leveraged LP can also be used to hedge existing positions, helping manage risk and protect against market volatility.
Consider a user who has $10,000 worth of USDC and wishes to participate in leveraged liquidity provisioning. The user can borrow additional USDC from other users who have utilized the USDC earn feature, increasing their total liquidity position. By doing so, the user can amplify potential returns from trading fees and rewards. However, they must also manage the associated risks, such as interest payments and potential liquidation.
It is built with the following technical functionalities:
Various Leverage Levels: Users can select leverage ratios (e.g., 2x, 3x) to scale their liquidity pool positions, defined and managed through the module’s leverage settings functions.
Automatic Liquidation Protocols: The system uses automated liquidation mechanisms by continuously monitoring collateral values. Positions are liquidated if the collateral value drops below predefined thresholds, as detailed in the liquidation logic within keeper.go and position_close.go.
Real-time Data and Analytics: Users have access to up-to-date analytics and performance metrics through comprehensive query functions. These include current leverage ratios, pool performance data, and historical returns, retrievable via methods defined in query.go.
Accessing the Module:
Log in to the Elys Platform:
Visit the Elys Network platform and log in with your account credentials.
Navigate to the Leveraged Pools Section:
From the main menu, select "Leveraged Pools" to view the available pools.
Select a Pool:
Browse the list of pools and select one to view its details.
Open a Position:
Click on the "Open Position" button.
Enter the amount you wish to leverage and select your desired leverage level.
Confirm the transaction by following the prompts.
Monitor and Manage Positions:
Use the platform's interface to monitor your open positions.
Adjust your leverage or close positions as needed.
Understanding Leveraged Liquidity Provisioning: Leveraged liquidity provisioning refers to the process where users can enhance their liquidity pool positions by borrowing additional assets. This allows them to deposit a larger amount into liquidity pools, thereby amplifying their exposure and potential returns from trading fees and rewards.
Definition: Leveraged liquidity provisioning is a feature that enables users to borrow funds to increase their liquidity positions within the pools, enhancing their exposure and potential returns.
How Leveraged Pools Work: The Elys Network allows users to borrow funds, such as USDC, from other users who have deposited their assets via the USDC earn feature. Borrowed funds can be used to increase liquidity pool positions, by participating in pools enabled for leveraged liquidity provisioning. The borrowed funds are subject to interest payments, and leveraging positions can lead to higher returns due to increased pool exposure.
Key Terminology:
Leverage: Using borrowed capital to increase the potential return of an investment.
Liquidity Pool: A collection of funds locked in a smart contract providing liquidity for decentralized exchanges.
Collateral: An asset pledged as security for loan repayment, forfeited in case of default.
Borrower: A user who borrows funds to enhance their liquidity position.
Lender: A user who provides funds to be borrowed in exchange for interest payments.
Leveraged Liquidity Provisioning allows liquidity providers to use borrowed funds, typically in the form of USDC, to enhance their position within a liquidity pool. The leverage formula x = (n - 1) * xL similarly applies here, where xL is the initial liquidity provided by the user, and x represents the total leveraged position.
Borrowing and Synthetic Liability Creation: Upon entering the leveraged position, liquidity providers borrow funds to reach their desired leverage, which creates a synthetic liability within the system.
USDC Pool Deposits and Management: The deposited USDC is managed within the pool, with considerations for pool health and the proportional share of the liquidity provider. The system ensures that the leverage does not exceed the pool’s capacity to manage risk effectively.
Add Liquidity to Pool: Providers can add liquidity up to a maximum of 50% of the pool's size, balancing the pool’s health with the desire to maximize liquidity efficiency.
Potential Gains: Leveraged liquidity provisioning can amplify potential gains. Users can earn more from trading fees and rewards by increasing their position size.
Associated Risks: Leveraged positions are sensitive to market volatility, potentially leading to significant losses. If the collateral value drops below a certain threshold, the position may be liquidated to cover the borrowed amount.
Example Scenario: A user with $5,000 in USDC decides to leverage their position with 4x leverage. By borrowing $15,000, their total liquidity position becomes $20,000. If the pool generates a 10% return, their profit would be $2,000 on the leveraged amount, significantly higher than the $500 they would earn without leverage. However, if the pool incurs a loss, the impact on their position would also be magnified, highlighting the importance of effective risk management.
Automatic Liquidation
Automatic liquidation is a safety mechanism that closes a leveraged position if the collateral value falls below a predefined threshold. This helps to prevent the user from incurring more losses than their collateral can cover.
Conceptual Example:
If a user has collateral worth $1000 and the liquidation threshold is set at 80%, if the collateral value drops to $800, the system will automatically liquidate the position to protect against further losses.
Leverage Limits
Explanation: Leverage limits are set to control the maximum amount of leverage a user can use relative to their own capital. This ensures users do not take on excessive risk.
Example Calculation:
If the leverage limit is set at 3x and a user has $1000 in capital, they can borrow up to $2000, allowing them to have a total position of $3000.
Necessary Information: Pool ID, leverage level, collateral amount, borrowed amount, and target asset.
Step-by-Step Guide:
Access the Position Management Interface:
Log in to the Elys Network platform.
Navigate to the "Leveraged Pools" section and select the pool where you want to open a position.
Enter Position Details:
Select the desired Pool.
Select the leverage level.
Enter the collateral amount you will provide.
Specify the borrowed amount.
Choose the target asset for your leveraged position.
Review and Confirm:
Double-check all entered details to ensure accuracy.
Click "Open Position" to initiate the leveraged position.
Position Activation:
The system will process the transaction, and your leveraged position will be activated and reflected in your account.
Adjusting Leverage:
Access the Position Management Interface:
Log in to the Elys Network platform.
Navigate to the "Leveraged Pools" section and select the position you wish to modify.
Edit Leverage Level:
Select a new leverage level based on your risk and reward preferences.
Review and Confirm:
Ensure the changes are correct.
Click "Update Leverage" to apply the new leverage level.
Increasing Liquidity:
Access the Position Management Interface:
Log in to the Elys Network platform.
Navigate to the "Leveraged Pools" section and select the position you wish to modify.
Add Additional Collateral:
Enter the amount of additional collateral you wish to add.
Review and Confirm:
Ensure the additional collateral amount is correct.
Click "Increase Liquidity" to enhance your position.
Conditions for Closure: Ensure the position is not under liquidation, all borrowed funds are accounted for, and sufficient collateral is available.
Step-by-Step Guide:
Access the Position Management Interface:
Log in to the Elys Network platform.
Navigate to the "Leveraged Pools" section and select the position you wish to close.
Initiate Closure:
Click "Close Position."
Follow the prompts to confirm the closure, ensuring that all borrowed funds and interest are accounted for.
Final Confirmation:
Ensure all conditions are met and confirm the closure.
The system will process the transaction, and your leveraged position will be closed, with any remaining collateral returned to your account.
Module parameters in the Elys Network control various operational aspects of leveraged pools and other functionalities. These parameters ensure the system operates efficiently, maintains security, and provides users with a consistent experience.
Common Parameters:
Leverage Limits: The maximum leverage ratio users can apply to their positions.
Interest Rates: The interest rate applied to borrowed funds.
Collateral Requirements: The minimum amount of collateral required to open and maintain a leveraged position.
Pool Fees: Transaction fees associated with participating in leveraged pools.
Liquidation Thresholds: Parameters that define the conditions under which a leveraged position is automatically liquidated.
Leverage Liquidity Provisioning
Explanation: Leverage liquidity provisioning refers to the ability to enhance liquidity pool positions by borrowing additional assets. This allows users to deposit a larger amount into liquidity pools, thereby increasing their exposure and potential returns from trading fees and rewards.
Only pools enabled for leverage are allowed to borrow on leverage.
These pools are oracle-enabled, getting prices based on decentralized oracles.
Pools/assets are enabled for perpetual trading via governance with a maximum leverage of 25x.
Position health checks and automated actions manage collateral and mitigate risks.
Long positions can be collateralized with the asset or USDC; short positions can only be collateralized with USDC.
All long positions are settled in the asset, while short positions are settled in USDC.
