Leveraged Trading Via Lending Platforms

18 Pages Posted: 18 Feb 2024

See all articles by Lukasz Szpruch

Lukasz Szpruch

University of Edinburgh - School of Mathematics; The Alan Turing Institute; Simtopia

Jiahua Xu

University College London - Department of Computer Science; The DLT Science Foundation; École Polytechnique Fédérale de Lausanne; UCL

Marc Sabate-Vidales

University of Edinburgh - School of Mathematics

Kamel Aouane

Contango.xyz

Date Written: February 1, 2024

Abstract

Decentralised lending protocols enable users to enter a leveraged long or short trading position, which provides one of the economic rationales for over-collateralised loans. The smaller the haircut on the provided collateral (initial Loan-to-Value), the higher the leverage. This work compares loan positions on leading platforms with perpetual futures, a primary mechanism for trading leverage in a decentralised finance (DeFi) ecosystem. We introduce the notion of the \textit{implied funding fee/funding rate} and contrast it with the funding fee/funding rate for perpetual futures and find that the former is significantly less volatile than the latter. We also show that liquidations on decentralised lending platforms correspond to margin closeouts with the appropriately chosen maintenance margin rule, which we derive. Furthermore, we study PnL for both positions, the likelihood of liquidation for loan positions, and the margin calls for perpetual futures across multiple market conditions. The analysis of historical data and extensive simulations underpins our study.

Keywords: Cryptocurrency, decentralized finance, lending protocols, perpetual futures, arbitrage.

JEL Classification: F31, G14, G15, G18, G23

Suggested Citation

Szpruch, Lukasz and Xu, Jiahua and Sabate-Vidales, Marc and Aouane, Kamel, Leveraged Trading Via Lending Platforms (February 1, 2024). Available at SSRN: https://ssrn.com/abstract=4713126 or http://dx.doi.org/10.2139/ssrn.4713126

Lukasz Szpruch (Contact Author)

University of Edinburgh - School of Mathematics ( email )

James Clerk Maxwell Building
Peter Guthrie Tait Rd
Edinburgh, EH9 3FD
United Kingdom

The Alan Turing Institute ( email )

British Library, 96 Euston Road
96 Euston Road
London, NW12DB
United Kingdom

Simtopia ( email )

United Kingdom

HOME PAGE: http://https://www.simtopia.ai

Jiahua Xu

University College London - Department of Computer Science ( email )

London
United Kingdom

The DLT Science Foundation ( email )

London
United Kingdom

École Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

UCL ( email )

UCL Computer Science
Malet Place London WC
London, London
United Kingdom

Marc Sabate-Vidales

University of Edinburgh - School of Mathematics ( email )

James Clerk Maxwell Building
Peter Guthrie Tait Rd
Edinburgh, EH9 3FD
United Kingdom

Kamel Aouane

Contango.xyz ( email )

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