Everything to Know about CoinFLEX’s Deliverable Perpetual Swap, Repo Market, Spreads, and FLEX Token
Background
CoinFLEX, based in Seychelles, is an off-shoot of UK spot exchange CoinFloor, which has been trying to compete in the crypto derivatives space for nearly a couple of years now.
Their initial unique selling proposition has been to offer fixed-maturity futures on Bitcoin vs USD Tether that are deliverable — meaning that long positions would be delivering USDT, and short positions would be delivering Bitcoin. They have touted this as the first deliverable futures offering (despite the fiat side being a stablecoin) and that this would be a market segment within futures which would grow significantly versus the current cash-settled dominating players.
However these didn’t quite catch on with retail traders used to cash-settled futures which dominate the market, and a chunk of their volume was potentially just a function of “trans-mining” (popularised by the now-defunct FCoin), where FLEX tokens were issued to those who generated trade volume, as described in their whitepaper.
Now, they are launching what they call “CoinFLEX v2", which is introducing a number of changes:
- Multi-asset collateral
- Deliverable Perpetual Futures contracts
- A Repo market to borrow/lend USDC against BTC
- A high-leverage spread market of Quarter vs Perpetual
There’s a lot to unpack here but I’ll walk through how each of these things work.
Deliverable vs Cash-Settled Futures
Many readers probably haven’t even heard of deliverable contracts, let alone what a deliverable perpetual swap would look like.
First let’s talk about what a deliverable futures contract is. The entire bitcoin futures market is dominated by cash settlement. This means that upon expiration and settlement — whether it’s on CME, BitMEX, or FTX — the open interest (net open positions) in a contract is settled to an underlying index representing the spot price of Bitcoin.
For normal deliverable contracts, at expiration:
The long side needs to deliver USD (and receive BTC)
The short side needs to deliver BTC (and receive USD).
As such, going into expiration, the margin requirements are ramped up in order to make sure those holding positions can make good on their delivery obligations.
Within the cash-settled portion of the derivatives market, the perpetual contract, also known as perpetual swap or perpetual futures, is what dominates. In this contract, there is no expiration, and as such there is no settlement/closure of open interest. Instead, there’s a periodic funding rate that is exchanged between the open longs and shorts.
The funding rate in these perpetual contracts is set by measuring how “overvalued” or “undervalued” the contract price is versus the spot index price. A contract that is overvalued will lead to a funding payment (usually every hour or eight hours) from long holders to short holders (the balance is always 50/50). An undervalued contract will lead to short holders paying long holders. This mechanism is used to punish those driving a skewed contract price and anchor the price toward a spot index.
In CoinFLEX’s deliverable perpual contract the mechanism is different, and is based on the imbalance of delivery and the repo market representing the spread between spot and perpetual (explanation will come later).
Margin System: Multi-Collateral vs Unicollateral
Most of the bitcoin futures on the market are unicollateral — that is, they either force you to use BTC as collateral or USDT as collateral. Because Futures are a zero-sum game it is much easier to set one single valid collateral in the model and then winning and losing traders split that collateral in trades.
However, this old model of bitcoin futures is slowly changing. Two newer shops, FTX and BTSE, have popularised a multi-asset collateral model where the contracts offered are linear vs US Dollar and traders can pledge any number of assets as collateral which are valued in real-time versus USD.
CoinFLEX has now joined the club and offered the flexibility for users to have BTC, ETH, FLEX, USDT, or USDC as collateral — which would all be valued in USDC terms, and then traders use USDC collateral to trade the contracts offered on CoinFlex. When a trader realises a profit or loss on a position, it’s credited/debited in USDC terms, so if a trader realises a loss and has no USDC collateral, then CoinFlex converts the asset(s) into USDC to cover the loss.
This is a big change from their prior system and the linear contracts run by Binance, OKEx, and Bybit. Instead of using USDT, they now use USD Coin (USDC), so all profit and loss (PnL) is then in USDC terms.
Deliverable Perpetual Swap
The way CoinFLEX’s deliverable perpetuals (dubbed “derps” by its fans) work is unique relative to existing perpetual contracts. There is no measurement of the contract being overvalued versus an index price to determine the funding rate. Instead it sets the funding rate by the market rate for repurchase agreements (repo) between BTC and USDC matching the imbalance of long and short deliveries each day.
How does delivery work? For any positions open in the deliverable perpetual contract, there is the option by 11:00 UTC every day to either “auto-roll” or “deliver” your position.
If you opt to “auto-roll” your position, you will pay or receive some funding fee at 12 UTC (more on this later).
If you opt to “deliver” your position, you have to provide the full amount, either USDC or BTC, in order to meet the obligations associated with it. Therefore, there is no need to “ramp up margin”, as anyone who wants to deliver will need to set aside the full amount associated with their position.
So if you are in a long position of 1 BTC at $9,500, and at just before 11 UTC the index price is 10,000 USDC, then you need to provide the equivalent of 10,000 USDC, which will lock in from 11–12 UTC. and you will be delivered 1 BTC at 12:00 UTC.
A problem which you may already be thinking of now is, what happens if you deliver your position but there is not an equal opposite position to deliver so that you receive what you need? In comes the repo market.
Repo Market
To address the issue of delivery imbalance they have established a repo market between BTC and USDC. It’s an orderbook with prices represented as daily interest rates for which buyers can lend USDC for BTC:
The sellers in this market are lending out BTC for a USDC interest rate. So whether you are lending BTC or USDC in this market, the interest payment occurs in USDC terms.
So if you buy 1 contract at -0.15%, and the price is $10,000 for BTC/USDC, then you provide 10,000 USDC, receive 1 BTC (locked, you can’t use it) for 24 hours, and then at the end you give back 1 BTC, receive back 10,000 USDC, and an additional $15.
Another way to view this is that Repo is a spread market between Spot (BTC vs USDC) and Perpetual (BTC vs USDC):
A premium in Perpetual over spot manifests as negative Repo rates.
A discount in Perpetual versus spot manifests as positive Repo rates.
So how does this relate to the deliverable funding rate mechanism? Well, if you are holding a position in the deliverable perpetual contract and choose to auto-roll rather than deliver, then you will pay or receive a funding rate which equals the imbalance in the delivery for the day vs the repo market.
Imagine for example that for a given day there is 50 BTC delivered long and 10 BTC delivered short, this leads to a “net delivery” (long — short) of 40 BTC. This means that the longs are to receive 40 BTC more than there are shorts delivering this.
The system then will buy 40 contracts in the repo market, and the highest price that it hits is the funding rate at which shorts have to pay longs. If the repo rate is positive, the funding rate is negative (shorts pay longs), if the repo rate is negative, the funding rate is positive (longs pay shorts).
Perp vs Quarter Spreads
In addition to the deliverable perpetual contract there’s also normal fixed-maturity contracts, particularly Quarterly. This contract expires into the Deliverable Perpetual, so if you are long 10 BTC at expiry of the Quarter contract you will deliver into a 10 BTC long on the perpetual contract, at which point you have the daily option to deliver the position in full, or just take profit in the orderbook in USDC.
This is where CoinFLEX’s “250x leverage” product comes in: a contract that represents the spread between Quarter and Perpetual contracts. How does this work?
Well, let’s say the Quarter contract trades at $10,100, and Perpetual trades at $10,020. The difference between the two is $80, and is called the “spread”. You can “long” or “short” this difference. The synthesis of a long Quarter/short Perpetual captures this spread when you are “long”, and you profit when the premium on Quarter grows. When you’re short the spread, you are short Quarter, long Perpetual, and as the price difference between the two contracts shrinks, you will earn money.
So why are they able to offer such high leverage? Because when you have two concurrent open positions, you only need margin enough to cover the net exposure. Therefore if it’s 0.01% margin requirement to go long Perpetual, you don’t need to put another 0.01% margin down to go short the Quarter. Instead, the 0.01% is enough to hold both legs.
Implied Orders
In the two prior examples I described markets which use implied orders. The spreads market implies orders from the Perpetual and Quarter market. The repo market implies orders from the Perpetual and Spot markets. By mirroring liquidity from two orderbooks onto another, there’s more liquidity shared between traders of different strategies and approaches.
Bitfinex and BTSE currently do a variation of implied orders across FX pairs as well, but by and large this practice is quite limited in the crypto space. I think it’s inevitable that exchanges more and more will be adding this functionality to create synthetic orderbooks between different pairs.
FLEX Token
CoinFLEX also has an exchange token which is called “FLEX”. It is natively launched on Bitcoin Cash’s Simple Ledger Protocol (SLP). For the last 1.5 years or so its issuance has predominately been through trade-mining, where users on CoinFLEX who were generating volume were given FLEX as a reward. While this has wound down, they may be introducing “Open Interest” mining instead, where users who are holding positions on the platform are receiving rewards.
Holding FLEX on the trading platform gives you a variety of benefits, mainly:
- A discount when paying trading fees in FLEX (the more you hold, higher the discount)
- Access to options-trading
- A % of profit is used to buy and burn tokens
The performance of the token hasn’t been very impressive but if this v2 of CoinFLEX gains traction and takes off it could plausibly lead to a value-add on the token as well.
Conclusion
CoinFLEX v2 is an interesting new approach CoinFLEX is taking. They’ve improved their API, added a flury of new products and features, and are reconciling their strategy of offering deliverable futures with the market demand for cash-settled functionality.
