Trading In Uncertainty: Unibot’s 2x leverage
Liquidity providers in V3 automated market-makers often face Impermanent Loss (IL). Many LPs have asked the Diamond Team about the effect of IL on their positions. While we won’t get into the technical details of IL, we want to show how Diamond Unibot can help LPs earn better returns and beat the odds.
Diamond Unibot offers users leverage and exit price options to hedge against directional price movement and minimize impermanent loss. Depending on the selected leverage (1.5x, 2x, 2.5x, or 3x), opening a leveraged liquidity position on Unibot involves borrowing an asset from Diamond Pool, then buying or selling assets to form a short/long component of the position before opening it on the underlying V3 AMM. Please see the table below for more details.
Now let’s assume that there is a price movement of +10% for ETH, and that our trader has decided to close his position at that point. Impermanent loss is estimated via online IL calculators. Unibot’s PnL is calculated by:
PNL = Earned Uniswap fees — loss from long/short position (if there’s long/short profit, it’s+) — IL
*not including platform fee and interest from borrowing
Our rough example above shows 1.5x would produce favorable results in a bearish swing and the opposite for 3x. If we simulate the above situation, the vice versa remains true with a -10% price drop in ETH, where 3x leverage would show higher returns. In either price direction, however, 2x leverage provides a positive return.
It is essential to know that impermanent loss strictly depends on the deviation of your closing price versus your initial entry price. To minimize IL, it is beneficial for traders to select their exit price options close to their entry price. For instance, the back-test result of a 10-day, USDC/WETH 0.05% pair with a 15% range opened at 2x leverage. You can get a similar graph before opening any positions on Unibot via the “simulate your position.”
We can see that ROI remains the highest at the tip of the yield curve, which is also exactly at 0% price change from your entry price. What this means is that when you decide to close your position, it is best to set either your upper or lower bound exit price — depending on the price change direction — at your initial entry price; the closer a position is closed to its entry price, the lower the IL losses.
When using 1.5X and 3X leverages, the yield curve tip may not be at the entry price. This is because these leverages offer additional long/short profits, and the tip price is when the long/short profit plus the IL effect is optimized. If the spot price moves away from the tip price, the IL will decrease the long/short profit, eventually impacting the Uniswap fees and principal amount. Reviewing the simulator yield curve and identifying the tip price to close your position around or at that price is essential.
Why Not 3x Every Time?
Some of our more risk-loving users often pick 3x leveraged positions for faster fees and more significant returns — bigger is better right? However, 3x leverage, while potentially lucrative, also exposes the users to higher IL and lower thresholds for liquidation. After all, you are opening a position with 3x the amount of your original capital. Hence your impermanent loss would also be intensified. Our trading competition winner for April to May utilized a long-term, 2x leverage strategy to earn the top place, with over 980 ARB earned.
Utilizing 2x Leverage
One interesting method to use 2x leverage over a long-term LP providing position would be to utilize our exit price settings. For example, when we first create our position at 15%, we can set up a wider exit price range, as if we set too tight exit prices we may be auto-closed by Unibot before we accumulate fees. After a few days of accumulating fees, we could then update our exit price to reflect the current market condition. If the current price has dropped below our entry price, then we could change the upper bound of our exit price to exactly our entry price. Should the market rebound our LP position would auto-close with minimal IL. The reverse also holds true; if the market is above our entry price, we could set the lower bounds of our exit price to our entry price to wait for the price to hopefully drop again.
Need to See it to Believe It? Join Our Bi-Weekly Trading Competition
Participate in our bi-weekly trading competition starting June 19th and get a chance to win attractive rewards based on your performance in two categories: USDC and ARB. Whether you’re an experienced trader or just starting out, this competition is open to all traders on our platform. Show off your trading prowess, compete against fellow enthusiasts, and earn fantastic rewards. Every other week, the highest Profit and Loss (PNL) achievers in both categories will be crowned as winners, receiving rewards equal to 20% of their PNL, with a cap of 100 USDC or 100 ARB respectively. Prizes will be distributed directly to winners’ trading accounts within one week after each competition. Don’t miss out on this incredible opportunity to trade, compete, and win!
Diamond Unibot is committed to helping our users to better understand the market and help everyone earn more together. The content in this article is based on our observation and for educational purposes only, and does not constitute investment advice. Please do your own research and form your own positions and strategies, this article does not constitute financial, investment, trading, or other types of advice or recommendations supplied or endorsed by Diamond Protocol. For full risk disclosure & disclaimer please visit here.
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