Opportunities with Leveraged Products in DeFi

Leveraged products are risky, do your research before trading them. This article does not represent financial advice for their use.

In the financial world, something called "leverage" is used to trade certain markets with more money than the person has, and to access it, you have to put up some assets as collateral in the trading process. DeFi (decentralized finance) allows operating in this type of market in a more agile, flexible way and with fewer requirements.

Types of Products Available

The types of products available for now (hopefully there will be more in the future):

1. Leveraged Tokens.

2. Perpetual Contracts

3. Margin Trading

   
   

Leveraged Tokens

A leveraged token represents a token that gives its holder exposure to the price of an asset, with leverage within a certain range. If a leveraged token gives its holder 2x price exposure to BTC, then if the price of BTC increases by 10% today, the price of that leveraged token should increase by close to 20%. It is used in many secondary markets on commodities, with people highly specialized in this type of transaction due to its complexities.

Perpetual Contracts

A perpetual contract is a derivative that allows traders to speculate on the price movement of an asset without owning the asset itself. Traders typically use some stablecoin as collateral to open positions for an asset with leverage. If the price of the asset goes the same way as the position, the trader will receive more of the collateralized stablecoin when they close the position; otherwise, if the price moves against him, the trader will receive less stablecoin upon closing the position, even losing everything.

It is also widely used in commodities, where we generally do not have access to the asset (gold, silver, wheat, and others), with a high risk. Examples of projects in this area are Perpetual Protocol and Futureswap.

Margin Trading

Margin trading works with lenders who lend their tokens and receive interest in return; on the other hand, margin traders who deposit assets as collateral to borrow tokens from lenders to trade with leverage.

Transactions for margin trading are fully funded, unlike perpetual contracts, reducing position closure risk. A clear example is if a trader craves 2 ETH, under the hood, this trader borrows USDC from lenders and buys 2 ETH on the spot market of one exchange, sells it on another exchange, and pays back the borrowed USDC and keeps with the margin obtained.

There are many technologies in each one (even the one that is the most built-in DeFi on this type of product that we are mentioning), a concrete example is Sushi Kashi.

What Comes Now?

Now builders must start creating more services with DeFi for this type of product, not only as competition to the current ones but because with new regulations and adoption of DeFi at the institutional level, we will begin to see transactions of this type associated with RWA (Real World Assets) and the number of users will advance to levels in which we must be prepared.

We need to build more products on new Blockchain networks, such as SORA, Polygon, Astar, Acala, and more current protocols that are making waves and giving us a number of opportunities.