Master CompliFi’s x5 Derivatives: Leverage Without Liquidations
Let’s face it.
Trading on leverage introduces a whole new level of ‘stress’ for traders.
Liquidations. Margin calls coming directly to your phone or email. Seeing your whole position wiped out by a scam wick on a reputable CEX. Not to mention unpredictable funding rates eating into your available balance.
Leverage trading doesn’t have to be that way.
In April of 2022, compli.fi launched derivatives that offer x5 leveraged exposure to assets like BTC, ETH, SOL, LINK, and MATIC without forced liquidations or margin calls which are also perpetual.
Correct. No liquidations or margin calls on a leveraged position.
These derivatives go by the full name of ‘Perpetual x5 Leveraged Tokens’.
Wait, perpetual? Yep.
Sounds cool? The best part is yet to come.
After studying the protocol for 3 months now, I feel confident in explaining the magic of CompliFi’s x5 derivatives to the world.
Note I’ll be calling these instruments x5s from now on. Devs should do something about that full name.
In this piece, I’ll answer the following:
- What is a Perpetual x5 Leveraged Token?
- How is such a derivative created?
- How do x5 derivatives offer leveraged exposure?
- How to properly trade x5s?
Grab yourself a cup of coffee and let’s begin!
What is a Perpetual x5 Leveraged Token?
Put simply; it’s a token that acts as if you had an x5 leveraged position on a specific asset. It’s also perpetual, which means you can buy into it and even hold it for a more extended period depending on your strategy — all that without worrying about getting liquidated.
For nerds: K% change in the price of, say, ETH equals 5*K% in ETHx5. You are just multiplying daily growth rates by 5, within a +/-20% range.
How’s it possible that a leveraged position can’t get liquidated?
Bear with me. An x5 is a token. A simple ERC-20 that can’t be liquidated. This brings us to the next question:
How is such a derivative created?
All x5s on complifi are powered by a single USDC pool. Every asset like ETH or MATIC always has two derivatives called Up & Down tokens:
I hope the names of these derivatives are pretty self-explanatory!
Here’s the secret sauce of how x5s can’t get liquidated:
Complifi protocol issues all x5 in UP-DOWN pairs collateralized with 2 USDC ($1 USDC backing UP & $1 USDC backing the DOWN x5 at the beginning of a derivative’s life). The key part: their combined value always stays at that level.
What does it mean in practice?
In a trading environment, x5 tokens derive value from movements in the underlying asset price. They move in opposite directions but within the confines of Up + Down = 2 USDC.
For example, when MATICx5 UP trades at $1.50, the MATICx5 DOWN trades at $0.50. See? Their combined value is still 2 USDC.
You can be down on your position even 99% and still don’t get liquidated. There’s always USDC backing your x5.
Note you never have to borrow funds when trading x5s on complifi. In other words, when you buy the x5 token, you collateralise it upfront, for all possible market developments.
How do x5 derivatives offer leveraged exposure?
First, it wouldn’t be possible if it wasn’t for Chainlink’s Price Feeds.
To better understand how UP/DOWN x5s are being priced, let’s assume that ETH trades spot for $2000.
Suppose you have a strong conviction that ETH will go up, so you decide to buy into the ETHx5 UP token on CompliFi.
For simplicity, assume that ETHx5 UP trades precisely at $1.00, which means that for a budget of $1000 USDC, you can get 1000 ETHx5 UP tokens:
Cool, you are now exposed to ETH price movements via ETHx5 UP tokens.
Now, say the ETH spot goes from $2000 to $2200 on Binance and all CEXs and DEXs we know, and that’s a 10% change.
CompliFi immediately reads Chainlink’s price feed for ETH and alters the value of the ETHx5 UP token from $1.00 to $1.50.
(A kind reminder that x5s offer leveraged exposure to a specific asset! 1% spot change for ETH is 5% for an x5 derivative)
In this situation, you are still holding 1000 ETHx5 UP tokens, but each is valued at $1.50. You can now sell it all back to USDC for roughly 1500 USDC (minus fees/slippage).
The mechanics are no different when buying into ETHx5 DOWN tokens. If the ETH spot goes down by 1%, it’s a 5% (gain) for ETHx5 DOWN holders.
How to properly trade x5s?
X5s operate in 24-hour cycles. These are displayed here:
At the start of the new cycle (also called a vintage), x5 UP & x5 DOWN are valued at $1 each. Once Chainlink’s price feeds detect any changes to the underlying spot price of a given asset, it alters the values of derivatives.
If you buy into ETHx5 UP precisely at $1.00, you can get a maximum gain of 100% within that 24hour cycle.
A reminder that each UP token is bundled with a DOWN token, both backed by a total of 2 USDC. So if one x5 UP is valued at ~$2, the x5 DOWN is valued roughly at zero. No more value can be derived from the losing one to the winning one.
The nominal value of an x5 token can never go higher than 2 USDC, or below zero. You’ll never receive a margin call!
The good news is after the cycle begins, the values of x5s can change immediately, allowing you to buy into ETHx5 UP valued at, e.g. $0.25. From here, a ride to $0.50 is already a 100% gain, while to $1.00 is a sweet 300%. Keep in mind there’s still room for it to be valued at $2 if the market moves in your favour.
Again, the same mechanics apply when buying x5 DOWN tokens and let you earn as the spot price of the underlying asset falls.
What happens with my x5 when the new cycle starts?
Let’s circle back to the scenario where you have 1000 ETHx5 UP tokens worth $1.50 each. Instead of cashing out to USDC, you decide to hold it for the next 24 hours.
During cycle rollover, your proceeds are used to purchase a new set of ETHx5 UP tokens valued at $1.00.
What’s really happening behind the curtain: the old derivative is settled => turned into a pile of USDC => this pile is (atomically) used to buy derivatives from new x5 vintage for you
Let’s do quick math:
Old cycle: Holding 1000 ETHx5 UP tokens worth 1500 USDC.
New cycle: You’re now holding roughly 1500 ETHx5 UP tokens also worth 1500 USDC.
You’re still in the game, betting on ETH going up, keeping your proceedings from the old cycle without worrying about getting liquidated.
That’s the beauty of x5s.
Please note that x5s are not completely risk-free. Here’s why:
You cannot get liquidated indeed, but you can theoretically get settled at zero — e.g. if you bet ETHx5 Up and ETH goes down by 20% in 24h and doesn’t recover by the next settlement.
- In order to maintain your x5 position, you’ll pay fees to liquidity providers at each rollover. These are significantly smaller than regular AMM fees when entering/exiting an x5 position.
- You can exit your x5 position anytime back to USDC.
- Your x5 can be down -100% and you still be in the game until the next cycle.
- You buy into any x5 straight with USDC.
Read my previous post on mastering USDC liquidity provision on CompliFi
* This article is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Always do your own research.