Introducing Particle Leverage AMM

Compound interest is a concept often mentioned as the eighth wonder of the world, “he who understands it, earns it … he who doesn’t… pays it.”

Leverage is arguably the ninth.

In today’s markets, from high-frequency quant funds to retail traders on Robinhood and now to the world of cryptocurrencies — leverage is an important cornerstone of financial markets worldwide. Across different trading platforms, we universally see leverage trading volumes surpassing spot volumes by at least a factor of 10.

Until now, access to leverage trading has been governed in a centralized manner — exchanges have to list and gate certain tokens to enable leverage trading. This current norm creates huge friction and additional platform risk for traders who want to access leverage on new or exotic token pairs.

What we envision is a truly permissionless leverage trading protocol.

Just as Uniswap allowed any tokens to be tradable,
Particle will allow any tokens to be tradable with leverage.

Key Idea: Unlocking Concentrated Liquidity

To make leverage trading permissionless, we’ve built a brand new protocol from the ground up.

Taking a first-principle approach, any form of leverage involves borrowing an amount of asset that has a higher value than the original investment. To leverage the vast amount of DeFi liquidity, Particle protocol enables traders to directly borrow from liquidity pools at automated market makers (AMMs) with concentrated liquidity (Uniswap v3 as a start).

This is the foundation of Particle’s Leverage AMM (LAMM).

For an liquidity provider (LP), capital preservation is the first priority. The protocol must ensure that the borrowed asset can always be made whole at all price conditions (i.e. LPs never lose their liquidity).

Traditionally, protocols rely on liquidation engines to trigger in time, which inevitably relies on an accurate price oracle and enough external liquidity from the market. These stringent requirements often open up multiple attack angles especially for illiquid, long-tail assets.

Particle protocol, however, implements a completely different method to solve this. For any concentrated liquidity position of a token pair, its price boundaries mathematically define the amount of tokens to convert at all price points. When borrowing from a concentrated liquidity position, the protocol calculates the exact amount required to top up, such that the contract locks enough tokens in case the price moves adversely to a price boundary (see below for a concrete example).

In addition, by recording the accumulated swap fees at borrowing and returning time, the protocol ensures the borrower pays an interest that’s no less than the swap fee that the borrowed liquidity would have earned from the original pool.

This way, Particle is able to generate for LPs strictly higher interest fees with no higher impermanent loss than its original swap liquidity provision.

Example

Context:

• Consider an ETH/USDC LP position, concentrated on a [1800, 2200] USDC per ETH price range.

Scenario:

• Current ETH Price: 2000 USDC
• Position: Long ETH using USDC

Calculations:

• Based on Uniswap math (details here), for this LP position at the current price, borrowing 10¹⁴ units of liquidity would result in withdrawing 0.104 ETH and 229.495 USDC.
• Assuming no price impact, converting 229.495 USDC into ETH at the current rate (2000 USDC/ETH) would yield 0.115 ETH.
• If the ETH price drops below the lower bound (1800 USDC/ETH), the 10¹⁴ units of liquidity will be concentrated as 0.225 ETH (and no USDC).

Outcome:

• The trader needs to put down 0.225 − 0.104 (borrowed ETH) − 0.115 (swapped ETH) = 0.006 ETH.
• This ensures that the LP is guaranteed to receive back the 10¹⁴ units of liquidity regardless of ETH’s return price.
• This is because, at the lower boundary, the maximum amount of ETH is guaranteed to cover the borrowed liquidity, regardless of the combination of ETH and USDC.

Leverage Analysis:

• The trader uses only 0.006 ETH to leverage 0.219 ETH worth of liquidity.
• This equates to a leverage ratio of 0.219/0.006 = 36.5x.

Permissionless and Scalable

With this design, Particle protocol eliminates the need for a price oracle — eliminating a number of potential attack vectors and the potential for market manipulation.

For most traditional perpetual futures platforms, the counterparty of traders (e.g. taking long positions) are traders on the other side (e.g. taking short positions). These platforms require sophisticated mechanisms to manage counterparty risks by balancing the incentives on the two sides (e.g. with dynamic funding rates).

On Particle, the leverage comes from the relative value increase/decrease of the underlying assets. This means that the Profit and Loss (PnL) is determined by the performance of the asset itself, as opposed to a counterparty’s loss.

The scalability of the Particle protocol means that with enough available liquidity, the protocol can efficiently support a wide range of trading positions — whether it’s managing a single long position, accommodating a massive number of 10,000 unbalanced long positions, or balancing a combination of 5,000 long and 5,000 short positions.

Particle can handle these positions seamlessly at scale.

Premium Model with No “Forced” Liquidation

Traditional Platforms:

• “Forced” Liquidation: a trader’s position is liquidated whenever the price crosses a certain threshold that is unfavorable to the trader. This approach can be quite stringent and requires constant monitoring of price movements.

Particle Protocol:

• No Price-Based Liquidation: On Particle, since each position is guaranteed to lock in enough tokens at the time of opening, the LPs are always protected regardless of price fluctuations.
• Consequently, Particle does not implement price-based liquidation, allowing a position to stay open even if short-term price movements are against the trader.

Premium Model with Fixed Term Borrowing:

• Particle protocol implements a premium model with a 3-day fixed term for borrowing. At the time of opening a position, traders select a portion of the liquidity as their premium.
• Interest Accrual: The position then accrues interest at a rate equivalent to what the borrowed liquidity would have earned as a swap fee in its original pool. On a technical level, Particle contract records the fee tracker on the liquidity boundary at position opening. The current fee tracker allows for the calculation of the pro-rata swap fee owed to the borrowed liquidity.

Withdrawing Borrowed Liquidity:

• When an LP decides to withdraw liquidity and stop earning interest, the unborrowed liquidity can be withdrawn at any time.
• Particle provides a function to seize liquidity after the 3 day fixed term borrowing. Whenever the interest eats up the premium or the borrowing term is expired, anyone can close the position as an external liquidator, earning some portion of the premium as liquidation reward.
• The portion amount and 3-day parameter can both be later adjusted by governance.

Capital Efficiency and Yield Opportunities

Particle protocol introduces two significant methods for yield enhancement from the perspective of liquidity providers.

1. Additional Fees on Leverage Positions:

• Trading Fee: For every leverage position opened, the trader pays a fee of 0.05% of the leveraged amount.
• This trading fee is in addition to the standard interest that the borrowed liquidity would have otherwise earned through swapping activities. This mechanism is designed to ensure that LPs earn markedly higher fees by enabling lending within the Particle ecosystem.
• Particle treasury splits the trading fee with the LP supplying the liquidity. The treasury will be used to further reward and boostrap liquidity for different token pairs.

2. Yield from Out-of-Range Liquidity:

• Borrowing of Out-of-Range Liquidity: Typically, when a concentrated liquidity position falls out of its price range, it ceases to earn the usual swap fees.
• In Particle, however, traders can still borrow this out-of-range liquidity for leverage trading, paying a position fee directly to these LPs. This model enables LPs to continue earning yield from their liquidity even when it falls out of the active trading range.
• From the trader’s perspective, this arrangement offers the advantage of interest-free leverage, provided that the price does not revert to within the concentrated liquidity range.

Incentive Alignment

By design, Particle protocol aligns the fundamental interests of multiple parties.

1. Token Projects:

• Increased Attention and Faster Price Discovery: The introduction of leverage trading attracts more attention to token projects, facilitating quicker price discovery.
• Boost in Trading Volume: This form of leverage trading involves actual asset swaps on the spot market, directly contributing to increased trading volumes for the token projects.

2. Liquidity Providers:

• Yield from Borrowed Liquidity: LPs benefit from lending out liquidity, especially from positions that are out of the active price range, as it generates additional interest.
• Higher Swap Fees generated from Increased Trading Volume: The surge in trading volume due to leverage trading ultimately results in an increase in swap fees for LPs.

3. Automated Market Makers:

• Enhanced Earnings from Swapping Fees: The Particle protocol’s LAMM architecture is built on AMMs with concentrated liquidity. Since each trade within the protocol involves swapping on spot markets, the underlying AMMs accrue increased swapping fees.

4. Traders:

• Access to Leveraged Positions: Traders, provided there is sufficient liquidity, can access leveraged long or short positions for any token pair.
• Market Influence: Each trading position involves actual swaps, giving traders the ability to move the actual market.

Join Our Journey

We will be inviting interested community members to participate in our upcoming private Alpha Test here.

If you have any questions or want to learn more about the Particle protocol — please stop by our Discord or email us at team@particle.trade.

We will also be posting exciting updates and announcements throughout our launch on Twitter.

Note: On January 17th, Particle announced that we will be building on the Layer 2 — Blast.

https://x.com/particle_trade/status/1747526274720145742?s=20