The term leverage has always been a symbol of risk in the traditional financial market, but it has been used to the fullest in the digital currency market. The fundamental reason is that the risk preferences of the market population are different, and at the same time, DeFI decentralized finance and traditional financial banking core In the operating system with banks as the core, banks usually use leverage to provide themselves with a higher level of income, while the official is most concerned about the overall stability of the banking system. Once the banking system is over-leveraged to bring The risk is that the government pays for the bank, that is, printing money to alleviate the systemic risk caused by leverage.
In the decentralized smart contract mode, there is no need for anyone to pay for the other party, and the risks brought by any high leverage are all borne by the leverage user and the leverage provider, and there is no such thing as a player in the system being boiled by inflation. The situation arises.
secondary title
overcollateralized lending
Excess borrowing itself is also a kind of leverage, which can be minted or exchanged for other assets by mortgaging more than 100% of assets. This kind of borrowing of less than 100% can be completed through transactions. The assets are less than 100%, but the income obtained can exceed the income brought by the direct exchange of assets.
Since the over-collateralization itself also uses leverage, although the leverage ratio is less than 1, there are still restrictions on liquidation, that is to say, liquidation will be triggered when the mortgaged assets are not enough to exchange the lent assets, which also makes this seemingly safe The method makes the market appear more uncontrollable risks under extreme market conditions, and makes some funds that do not belong to the liquidation system themselves join the ranks of being liquidated under extreme market conditions, and such funds usually represent a relatively large amount of funds , Let the market run and cause irreparable losses.
Although the over-collateralized casting mechanism itself increases the liquidation pressure under extreme market conditions, it is still a necessary part for DeFi. In a market with no credit at all, the over-collateralization itself represents the integrity system in DeFi, which excludes individual Individual credit analysis also simplifies the process of information collection and releases the liquidity of collateral with a unified process operation.
flash loan
flash loan
Flash loan itself is one of the greatest innovations in DeFi, because it allows any market participant to act like a giant whale during the transaction. Arbitrage transactions in traditional financial markets often require extremely large initial funds , Sufficient funds can make the trading gap itself very narrow, and the income can be magnified through the existence of funds and leverage, making the originally small trading space profitable.
The scariest thing about flash loans is that they exceed the demand for funds. For the market itself, arbitrageurs and fund owners are two kinds of people. It is to look for tradable space in the market, but it does not have a huge amount of funds to conduct transactions. The existence of flash loans allows itself to have technology, and people who lack funds instantly become giant whales. Any transaction cracks in the market will It was filled instantly with a huge amount of funds. This means that there will not be a large amount of arbitrage space in the DeFi market. While the space is filled by arbitrageurs, traders and ordinary market participants will have a better trading experience, because there will always be arbitrage in the market There will be no high price difference.
The reason for the birth of the flash loan originally came from the loan mechanism in the digital currency market. Due to the completely anonymous nature of the digital currency market system, it is impossible for individuals to have the concept of credit, because although there is an account in the market, creating a It can be said that the new account has no concept of cost at all, and the creation of an account without cost will have no credit value. In a market without credit, the way of lending can only be through the concept of over-collateralization, that is, the traditional logic of pawnshops. The currency whose actual value is higher than the loan amount is mortgaged, and the loan transaction is completed in order to obtain credit through the mortgage loan model. It is also a unique logic in digital currency, that is, the logic of obtaining credit by using mortgage money, and then using credit to obtain money, and the over-mortgage model has caused a high waste of funds due to the excess limit, which is the flash loan agreement reason being raised.
The flash loan business was first developed by AAVE, mainly for developers with a certain technical foundation. Today, the scale of the flash loan business has reached billions of dollars. This innovation has successfully pushed AAVE ahead of the old project Compound.
Due to the extremely large amount of instantaneous funds, the normal usage of flash loans is that arbitrageurs use capital advantages to carry out market arbitrage transactions. Arbitrage itself is ubiquitous in the financial market, and flash loans expand the scale of funds of arbitrageurs, and The rollback transaction feature allows arbitrageurs never to worry about the risk of the principal, because the principal itself is zero risk.
However, due to the existence of arbitrage robots and front-running transactions in the current market, the profits of flash loans have been reduced a lot. The existence of arbitrage robots makes the trading gaps in the market smaller, and at the same time increases the depth of transactions in the market, making short-term funds have an impact on the market. Lower, i.e. making arbitrage through flash loans more difficult and less profitable. At the same time, there is no queuing mechanism in the ETH network, which leads to the existence of front-running transactions. Every transaction in the market needs to be packaged by miners to complete the transaction. Due to the time difference between the blocks of Ethereum, not only flash loans appear. This zero-risk loan method also has the existence of preemptive trading robots. Before the transaction package is completed, if the trading robot determines that the transaction is profitable, it will increase the Gas fee to achieve the purpose of preemptive trading, so that the trading strategy of the strategy provider Was robbed.
secondary title
Margin trading and spot leveraged trading
If over-collateralization and flash loans are the unique ways of using leverage in DeFi, then margin trading and leverage trading are the simplest ways of using leverage in the financial market. Using leverage trading in the secondary market is simply to expand risks and benefits. The user group in the digital currency market is precisely the user group with the highest risk appetite.
The way of margin trading is the contract trading volume mode, which is a relatively common trading method in the market. The CFD mode makes the contract trading method more perfect because the target of its own transaction and the spot are not in the same market. What is traded is not the product target, but the volatility of the product table, that is to say, the contract transaction itself will not affect the spot market, because what you buy is caused by the rise or fall of the target within a certain period of time. spread.
For margin trading, as long as the margin in the trading account is sufficient, there will be no risk, because the providers of margin trading themselves are exchanges, that is, the exchange itself has the first-hand trading priority, you can The speed of wind control and liquidation is extremely fast. The problem faced by the margin trading model in DeFI is mainly the problem of transaction depth. Since it is completely separated from the spot market, the counterparties in the market are all contract users, which leads to It is difficult to have enough counterparties in the market, that is, either use the method of infinite depth (market maker counterparty), or face the sacrifice of transaction speed when there is not enough transaction volume.
Compared with the margin trading mode of CFDs, the trading mode of spot leverage is simpler and rougher, but it also faces greater risks. Because the mode of spot leverage is different from that of contract trading, it is necessary to actually buy and sell chips in the market. And the spot mode requires the existence of an order book even more, so that the provider of trading leverage still needs to be an exchange, or a middleware or aggregation product closely connected with the exchange. Since there is no credit in the digital currency market, leveraged trading needs real Expand the amount of funds for traders through the fund pool. If you do not have control over the funds, you will face the absolute risks brought by the funds, and at the same time face the risk of insufficient liquidity brought by the transaction target (use leveraged funds to take orders) .
There is also a leveraged automatic follow-up trading model in the current market. Traders become strategy providers. By providing margins to increase leverage ratios, transactions are then performed by smart contracts. Users have management authority over orders, but not funds. The right to control means that it not only alleviates the risk of betting against the dealer in CFDs, but also alleviates the capital risk problem of spot leverage. Like the original intention of AAVE to develop flash loans, many DeFi projects are now working on solving the problem of capital efficiency.
On the other hand, the business interaction between lending products and decentralized trading platforms in the current market is independent and fragmented. Users first need to pledge a part of the funds, replace another batch of funds and then trade in the DEX. This design is against common sense and is a great waste of the value of the pledged funds. For a long time, the capital utilization rate of the lending platform is also extremely high. Low, the final result is that the interest rate of the fund pool will be lower and lower. In addition, the entire process from lending to trading arbitrage is also very long and complicated. When the process is completely completed, the window of opportunity for users to operate is likely to be closed long ago.
Tail: Leverage will cause liquidity to dry up under extreme conditions, and it will also prompt the market to enter a desperate situation of queuing up and shooting (especially when Ethereum is congested).
But leverage is still a necessary tool for the market. The market must go through countless cycles of blowing bubbles and then popping them to prosper. Leverage is one of the best tools for blowing bubbles. If you want to judge whether the market is able to intervene Within the range, the leverage utilization rate is also one of the important reference indicators.
