CompliFi AMM is Live!
This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment, or to issue or trade derivatives, and should not be used in the evaluation of the merits of making any financial or investment decision.
After almost a year in development, our vision for simple decentralised derivatives is finally here. You can now trade derivatives and become an LP as easily as you would on Uniswap, with all of the hard maths hidden behind the scenes. Having laid this foundation, we are hugely excited about the possibilities ahead of us and are looking to continue making structured finance more and more accessible.
CompliFi Derivatives in a Nutshell
- No defaults: by design, all CompliFi derivatives are fully collateralised at all times, no matter how the market moves. There is always enough collateral to cover your winnings, sitting in a decentralised vault waiting to be claimed at settlement.
- No margin calls: when you buy a CompliFi derivative, the price you pay is the limit of your exposure. You may win or lose in the end, but you will never be asked to put up more funds.
- No liquidations: since there is never a margin call you could fail to meet, there is never a reason to liquidate. This functionality does not even exist in CompliFi (nor is it necessary).
ETHx5 and BTCx5
We are starting out with two derivatives — ETHx5 and BTCx5. They provide you with an opportunity to get 5x long or short leveraged exposure to ETH or BTC. For a more in-depth description, we highly encourage you to read this post, but here is a simplified and incomplete overview. We will use ETHx5 as an example, but the same logic applies to BTCx5.
- All derivatives come as long-short pairs — in our case, ETHx5 Up and ETHx5 Down.
- Both long and short derivatives start out at about 1 USDC, and will fluctuate between 0 and 2 USDC until settlement. They share a collateral of 2 USDC between them — winner gets more, loser gets correspondingly less.
- Within the 0–2 USDC corridor, % change in the price of ETH is amplified by 5x for the “Up” and by -5x for the “Down” token. For instance, if ETH price goes up by 2%, then ETHx5 Up changes in value by +10% and ETHx5 Down by -10%.
- When ETH prices go up or down by >20%, derivatives hit a boundary of the 0–2 USDC corridor.
The LP Token
When you add liquidity to a CompliFi AMM pool, you receive LP tokens, just as you would on Uniswap. There is, however, quite a bit more maths going on under the hood. Here are the highlights, but please read our intro to CompliFi AMM and the whitepapers available on compli.fi for more details.
- The basic economics is similar to other AMMs — when traders buy and sell derivatives, they pay trading fees, which accrue to LP token holders.
- Differences begin with CompliFi pool contents. All pools contain two assets — the short and long position tokens for the same derivative. This makes LP tokens largely market neutral — when the long position decreases in value, the short position increases. For instance, while Uniswap LP tokens for the ETH+USDT pool would suffer if ETH price went down, CompliFi’s LP tokens almost don’t care.
- We keep saying “largely” and “almost” because full market neutrality is impossible to maintain. Traders will buy derivatives from the pool and quantities of long and short tokens will no longer be equal, leading to market risk.
- CompliFi manages market risk in two ways: 1) exposure is never allowed to exceed predetermined limits; 2) when a swap makes LP risk position worse, the AMM charges a higher trading fee for it.
- In summary, we are trying to make CompliFi LP tokens a source of solid risk-adjusted returns, underpinned by algorithmic risk management. To be clear, losses are always possible. What we are trying to achieve is make significant losses rare.
Using the CompliFi App
The CompliFi app (app.compli.fi) is designed to resemble a generic AMM interface, with a side serving of critical derivatives data. It currently has three tabs — Swap, Pool and Portfolio.
Swap and Pool tabs contain largely the same functionality you would expect of a regular AMM. In the Swap tab, you can buy/sell a derivative vs USDC. In the Pool tab, you can use USDC to add liquidity to a pool of your choice, or to redeem your existing LP tokens.
What distinguishes CompliFi’s UI is the Portfolio tab, which shows all of your CompliFi assets in one place. A key functionality located here is the ability to redeem a settled derivative or LP token — a simple process of exchanging it for collateral at the end of its life. Going forward, we will look to add more and more analytical tools to this tab, allowing you to assess your derivatives position from a variety of angles.
As ever, please remember that decentralised derivatives are an early experimental product. Even if you have a solid fundamental understanding of financial engineering (which you absolutely should have to even consider committing capital to such instruments), you may still lose money for any number of reasons. As a rule of thumb, please assume that you will lose all of the capital you put in.
Important Links
If you are interested in joining the game of derivatives with no margin calls, or just want more information about CompliFi and its governance token COMFI, please visit our social media channels and documentation hubs listed below.
