More ways to earn yield using OpenLeverage
DeFi has revolutionized how cryptocurrency users think about their investments to go beyond buy, swap, and HODL to Yield Farming to advance their holdings. Using liquidity pools to power decentralized exchanges (DEX) has exploded over the past year, but DEX trading has lacked a way to support margin trading for most token pairs. The OpenLeverage protocol is the first to introduce a way to earn high yield by creating liquidity pools used by margin traders for any token pair on a DEX.
OpenLeverage is a permissionless margin trading protocol. Anyone can create a market for margin trading any pair on an existing DEX using this protocol. A token supplier can then lend any single token in an OpenLeverage liquidity pool. OpenLeverage does not require depositing to both sides of the market pair, nor experiences impermanent loss, as we are not performing any market making to achieve yield. In exchange for providing liquidity, the pool will issue an “LToken,” which represents their portion of contributions to the pool’s liquidity which accrues yield from the margin traders borrowing tokens.
Traders borrow tokens from the pool to make a short or long position. The supplier then earns yield from the borrower making a spot trade on a DEX held by an OpenLeverage smart contract.
The demand for margin trading transaction will increase from borrowers during volatile market periods. Suppliers will earn very high yields for lending their tokens in a liquidity pool.
As the borrowers draw upon the lending pool more significantly, the OpenLeverage protocol automatically and dynamically increases the borrower lending rate. The increased rates will incentivize others to join in yield farming to provide more liquidity to the pool being used. The supplier then returns their LTokens to the pool to retrieve their original token in addition to the yield accrued. When the borrower closes position through the OpenLeverage smart contract, another swap is issued on the DEX, and the borrowed collateral and interest is restored to the pool and any remaining collateral with PNL is delivered to the borrower.
Even further rewards beyond yield will be available once the OpenLeverage DAO is launched. For example, the OpenLeverage DAO will have the ability to assign specific pools as OLE incentivized. The incentivized markets will issue OLE tokens over a period of time to LToken holders as a means to encourage adding further liquidity to the pool. When the supplier returns LTokens to the pool for the underlying token, the supplier will also extract the rewarded OLE tokens for their participation in the incentivized OLE pool.
The protocol has made the best efforts to reduce risk while providing substantial rewards but suppliers still face risks. Each borrower must place collateral against their margin trading position. However, there is the potential that a significant market event — especially against a low market cap coin involved in an isolated trading pair — could cause an event where the collateral is insufficient to maintain the positions. While anyone in the world can attempt to liquidate the position, it is theoretically possible that anyone cannot liquidate the position fast enough. Unable to liquidate in a timely fashion could result in a loss to the lending pool and, in an extreme event, the potential that suppliers would be unable to return LTokens for the original token.
For this reason, each lending pool pair is risk isolated, and any impact would not directly impact any other pair. Each pair also has its dynamic rate given to borrowers, which the DAO adjusts to best suit the risk. Additionally, a third of all fees collected from traders are placed in a DAO maintained insurance pool. The DAO may vote to restore liquidity lost in an exceptional market event to a market, but there are no guarantees. While the margin trading loan collateralization, risk model, and insurance pools are designed to protect nearly all situations, suppliers must evaluate the risks and understand it is still possible to even loose their principal.
OpenLeverage is the first permissionless DeFi protocol for margin trading. While other margin solutions rely on Chainlink oracles, OpenLeverage can directly get pricing from the DEX on-chain and support margin trading on any existing DEX pair. Protocols like AAVE and Compound only support a few dozen tokens due to their reliance on oracles, leaving 99% of tokens pairs unable to support leverage trading. This new protocol will help bridge a gap that has prevented most projects from keeping leverage trading volume. Many new projects choose to list directly on a DEX — known as an “Initial DEX Offering” or IDO. OpenLeverage presents an ample opportunity for projects to include their tokens in OpenLeverage trading pools as an opportunity to gain additional trading volume and the significant yield on the tokens borrowed for margin trading.
DeFi is an unstoppable force in the cryptocurrency world, and adding margin trading will cause trading volume and adoption to increase further. OpenLeverage hopes to create more income opportunities for suppliers and traders borrowing any token, anywhere. By depositing tokens in the OpenLeverage lending pools, suppliers are not only helping promote DeFi adoption for margin traders but will earn high yield for their participation. Traders will have the opportunity to place margin trades on any pair while being rewarded in OLE tokens. We expect to see many new projects adopt OpenLeverage to encourage the adoption of their token on DEX trading by providing a margin trading pool.
We’ll be back soon with more on OpenLeverage’s advantages and features. Stay tuned!
