During market uncertainties or high volatilities, it is often unclear for most users whether the market would move drastically up or down. In these scenarios, users often take directional bets by longing or shorting the market. However, this can often be risky without proper risk management. Through ROE Trade, users can take leveraged bets to profit if the spot price moves sharply in either direction. What this user is trading is impermanent gains, the opposite of impermanent loss.
The biggest difference between ROE Trade and traditional long/short positions is that users are not liquidated based on spot price movements (long/short squeeze) but instead on the funding rates to maintain their open positions.
Taking ETH-USDC LP tokens as an example. When price moves up or down, it means someone has traded against the liquidity pool. Traders can borrow LP tokens and remove the underlying liquidity from the pool. In the case where spot price moves up, as a result of the constant product formula, the pool will hold slightly less ETH and more USDC. When closing the position, the trader will profit on the ETH that has increased in value thanks to the people who bought ETH in the pool.
The counterparty isn't the LP suppliers but the users who have traded in the wider pool itself. The same trade can be made on the way down. LP suppliers are paid additional yield to provide liquidity both to the pool and to the traders, while their risk remains the same as simply providing liquidity to the AMM pool.
There are 2 main factors that affect the user’s profit and loss.
- 1.The percentage difference between the entry price when a position is opened and the current spot price of the asset
- 2.The funding rate is an annualized variable rate is comprised of the respective asset's LP swap fees and the ROE borrow interest. The ROE borrow interest changes according to the utilization rate of the asset.
It is important for users to understand their risk-reward profile when using ROE Trade. We have provided a profit and loss calculator which can be found on the ROE Trade Dapp when users open or close a position. Alternatively, users can click here to access the profit and loss calculator. It is highly recommended for users have a target price within a set time frame in mind when using ROE Trade.
Aside from smart contract risks which are well managed by ROE, traders can get liquidated if their health factor falls below a certain threshold.
Soft liquidation occurs at 1.01 where ROE would liquidate some of the user’s position to rebalance the user’s health factor; this soft liquidation incurs a 1% liquidation fee.
The hard liquidation occurs at 1 where up to 50% of the user’s position can be liquidated, with a 5% penalty fee. Users can close their existing positions before liquidations occur.
The current position section shows the user their current health factor and estimated runway. The estimated runway is only a forecast as the funding rate can vary.