Wagmi leverage

Brief overview of Wagmi leverage

General Leverage overview

The platform offers a general leverage facility, built on concentrated liquidity technology. This system caters to three main participant groups: liquidity providers, traders, and borrowers​​.

Liquidity Providers (LPs): Wagmi enhances yields for V3 liquidity providers by offsetting impermanent loss. LPs can earn yield even when their liquidity position is out of range. When not utilized for trading, their liquidity position is lent out to traders/borrowers, earning them higher yields through premiums in addition to trading fees​​.

Traders: Traders on Wagmi can margin long or short any pair without the risk of forced price-based liquidations. Even if their position is underwater, they are only required to pay premiums to LPs to maintain their position. This model provides traders with access to high leverage on every asset and eliminates the concern of forced liquidations​​.

Borrowers: Borrowers can borrow any asset against another, enjoying no liquidation risk and extremely high Loan-To-Value (LTV) ratios by paying premiums to liquidity providers. Premium to liquidity providers is “borrow rate” that is adjusted automatically based on volatility and utilization of the liquidity. The lending model in the Automated Market Maker (AMM) allows liquidity to be built for any pairs without oracle risk, as pricing in Wagmi is managed by arbitrageurs and traders. This approach aims to unlock lendable liquidity for all on-chain assets​​.

This comprehensive structure facilitates a more fluid and risk-mitigated leverage trading environment, catering to different participants in the DeFi ecosystem.

Benefits of Wagmi leverage

Risk Mitigation: The design of Wagmi leverage significantly reduces the risks typically associated with leverage trading. By eliminating forced liquidations and leveraging premiums paid to liquidity providers, it offers a more stable and less risky trading environment.

Arbitrage and Price System: The absence of oracles in the system means that pricing relies on arbitrageurs and traders. This method reduces the oracle risk, common in many DeFi protocols, where reliance on external price feeds can lead to vulnerabilities.

Liquidity Utilization: Wagmi’s model ensures efficient use of liquidity. When liquidity positions are not in use for trading, they are lent out, maximizing yield potential for liquidity providers.

Future Developments: The protocol is set to expand its offerings, with features for borrowers being planned. These developments aim to further enhance the utility and flexibility of the platform for various DeFi participants.

Operational flow:

Fees and Liquidation: Fees for maintaining a position are deducted every second from the collateral balance. Liquidation occurs when the collateral balance turns negative, allowing anyone to close the trader's position.

Costs at Position Opening: When opening a position, the trader incurs the following costs:

a) The difference between the tokens received during liquidity extraction and the amount needed to restore this liquidity in case of the worst price movement.

b) A deposit to hold the position for 24 hours.

c) A liquidation bonus.

Acquiring Liquidated Positions: Anyone can become the owner of a liquidating position by paying off the collateral debt.

Liquidation Methods: There are three ways to liquidate a position:

a) Regular liquidation, aimed at earning a liquidation bonus.

b) TakeOverDebt, where the goal is to take over someone else's position by paying their collateral debt.

c) Piecemeal, which involves withdrawing one's liquidity from positions. This method is available only if liquidated by the provider and is considered an emergency (isEmergency).

Borrowing and Repayment Functions: When the borrow function is called, liquidity splits into two tokens. One is sold to obtain the maximum volume of the desired token to hold. Upon calling the repay function, part of the holdToken is exchanged for soldToken to pair amounts and restore liquidity. The sale occurs in the Wagmi pool or through an external service authorized by the contract.

TLDR

Wagmi leverage represents a significant advancement in DeFi by offering a novel solution that aligns the interests of liquidity providers, traders, and borrowers, while reducing risks associated with leverage and liquidity provision.