**This is not investment advice. It is an attempt to simplify concepts related to decentralized finance, and to provide an educational resource for parties interested in derivatives and the CompliFi protocol. All individuals should do their own research, and understand the risks associated with decentralized finance including full loss of funds**
Imagine you are running a race and the stakes are high; $100,000 is up for grabs if you can defeat your foe, and with every separating stride your winnings increase. But the unthinkable happens. You stumble shortly after the starting gun and your opponent seizes the opportunity, jumping to a massive lead. As you start to recover your stride hoping to salvage the race with still so much ground to cover, suddenly two race officials tackle you to the ground. ‘Sorry you fell too far behind…’ they say. ‘Your race is over and you owe us $10,000.’
If this imagined scenario were the rule, epic comebacks like this Olympic race would never happen. But sadly, for many in the world of crypto derivates and leverage trading, forced liquidations (falling too far behind) and margin calls ($10K debt) are a harsh reality. The past couple weeks of this month (May 2021) saw significant volatility with two large dips in the market after being red hot for the three prior months.
The suddenness of these drops due to Elon FUD and China’s ban on crypto for the umpteenth time left many leverage traders suddenly stumbling in the race. Forced liquidations not only impacted centralized exchange leverage traders, decentralized marketplaces like Aave where collateral ratios flashed to critical levels, and the sudden cost of the ETH network spiking upwards of 1500GWEI, caused havoc across the entire cryptosphere. Without warning billions of dollars were now out of the race forever.
I have talked before about this “comeback” concept in my original article about the CompliFi protocol, and by fully collateralizing derivatives there are no forced liquidations or margin calls. But talking about it versus seeing it in action is a much different story, and this months volatility has painted a picture so nicely I can write a thousand words about it, ha! So lets take a look at the historical graphs available in the protocol under Swap when you click a specific asset name:
On the left is a performance graph of the ETH 5x Up (Long) derivative, and on the right is ETH5x Down (Short). Looking the the Long side you can see before mid-month ETH was running strong and maxed out the nominal value of the derivative. On the opposite graph the Short positions quickly hit a nominal value of zero. If you were a trader on a CEX or even leveraging on Aave this is where you could have been forcibly removed from the race. But at CompliFi the Short holders get to keep “running” and as Elon turned to the darkside, plus China cracking down, the markets tanked and the Shorts began an epic comeback of their own nearly turning a full reversal in minimum to maximum derivative value. While the “race” is still going until month end, those savvy enough can see there was a lot of earning potential if you timed your Long exit properly and shifted into a Short. The key takeaway from all of this: Without forced liquidations or dangerous margin calls, volatility is now your ally, and both positions if played correctly can experience winning outcomes.
Market Makers — Money Makers?
As a decentralized protocol CompliFi needs market makers to provide liquidity and issue its derivatives. In return they receive trading fees from derivative swaps performed on the platform. These liquidity providers (LPs) are not directly playing the game of derivatives so their risk exposure is somewhat mitigated, but they are providing a market maker service which still does have risk potential. The above shows the four markets are in the green since June 1. Had a user taken a conservative position when the markets first opened and diversified by equally depositing across all pools, they would have experienced an annualized return of 43.82% APY on their USDC.
It must be pointed out that these are pure USDC returns in trading fees, and not inflated by incentives or protocol tokens! This is potential validation that a DeFi protocol can be sustainable for its LPs without the need for additional economical incentives. These annualized rates are excellent for a stable coin in DeFi, and simply amazing compared to what is available in the traditional fiat markets.
TL;DR— Don't find yourself finishing before the market climax! Use CompliFi to protect yourself from forced liquidations, and you might even find yourself some hot new APYs while you are at it.