Introduction to Levana Perps v2

Levana Dragon Rider

Published in

Levana Protocol

6 min readSep 1, 2022

TLDR: Levana Perps is awesome and has a lot of advanced tech under the hood!

Want to get started playing with it on Osmosis?

Http://trade.levana.finance

Introducing Levana Perps v2

Why design a new perpetual swap?

Levana intends to become the most widely used decentralized perpetual trading platform in all of crypto. In order to accomplish this, Levana is introducing a new type of perpetual swap to the market, the Levana Well-Funded Perps Model.

Imagine a perpetual swap that has no bridge or stablecoin risk. Imagine a perpetual swap with no insolvency risk. Imagine a perpetual swap that can support thousands of assets across hundreds of blockchains. The Levana Well-Funded Perps Model brings this to Levana Perps v2.

Levana Perps v2 is significantly different from the perpetual swap system Levana launched on Terra’s testnet in February 2022. After the Terra crash in May 2022, many perpetual swaps suffered significant challenges both technically and economically.

After the crash the mission of Levana Perps v2 became clear: build something that solves the major problems found within the majority of perpetual swap applications currently released in the world of DeFi. We believe that our Levana Well-Funded Perps Model achieves this.

TLDR: Problems with many current perps platforms

Exchanges become insolvent when the market moves in an extreme manner quickly
Exchanges are dependent on stablecoins and bridged assets, which brings significant risks
Exchanges require huge pools of capital to support moderate trading volumes (never capital efficient)
Exchanges cannot easily be ported to many different blockchains
Exchanges have high fees which are inflexible and difficult to predict

Finding and building solutions to these problems became the MVP for the goals of Levana Perps v2. Now, let’s break down the problems and their real world risks in more detail:

Goal #1

Build a perps swap that cannot become insolvent.

Insolvency means that the exchange has commitments of payout larger than the TVL (total value locked) in the platform. Imagine Luna is crashing, and suddenly the vast majority of market participants go short 10x, and liquidity providers, participating in the platform’s risk fund or insurance fund, remove liquidity. The platform is left with millions of dollars of short positions which are entitled to pay out, but the money is not there. This causes a bank run where only the first traders can get a portion of their winnings, and the rest are left with nothing as the exchange is bled dry.

A future post will outline the exact failure of these mechanisms and a few real world examples of where perpetual protocols using the vAMM model encountered insolvency.

Goal #2

Build a perps swap that can incorporate, but doesn’t rely on stable coins.

With the collapse of UST, it became apparent that the most robust perpetual swap platform would have no requirement in its architecture to use stablecoins. While stablecoin-backed positions powered by oracles are a great method to gain leverage access to any asset, there will always be a risk that the underlying stablecoins may face depegging or censorship.

Levana Perps v2 was redesigned to support opening and closing positions only in crypto assets with no need for stablecoins. At the same time users may choose to get access to more exotic assets, such as real world assets, or crypto assets not native to the chain of the exchange.

For example, if you wanted to gain exposure to DOGE coin on Levana Perps v2 running on Osmosis, you could open a position collateralized in wDOGE (not sure it exists today on Osmosis, but in theory it could) which was bridged to Osmosis, or you could open a stablecoin collateralized leverage positions using axlUSDC.

Goal # 3

Be simple to use.

Onboarding new users to an advanced tool such as perpetual swaps has always been a challenge. Levana Perps v2 focuses on a minimalistic user interface with a focus on attracting first time traders. Through Levana’s community and ongoing educational material, we aspire to bring on a new generation of traders using perps to augment and enhance their existing trading strategies.

Why are perps important?

Perpetual swaps are an important finance tool for a growing decentralized financial ecosystem. Perps offer two important financial tools not available in the spot market: shorting and leverage.

Leverage enables a trader to trade like a whale even if they are only a minnow. By taking on leverage you can minimize the extent of your total loss while optimizing your profits on a successful trade. Because the system cannot go into debt, your total exposure is the collateral you deposit into the platform.

Shorting offers traders a way to profit from a bear market. In addition, shorting presents a valuable tool to hedge an exposed position on a 3rd party platform. Liquidity providers, stakers, lenders and other strategies which require directional exposure to an asset can all be hedged via short positions which can be held open for an extended period of time via Levana Perps.

What problems exist in the world of perps today?

Centralization

Many existing perpetual swap platforms rely on a central operator or small set of operators to manage an order book. While this provides fast and low cost order matching, it presents a problem regarding a single choke point for the platform. Levana Perps does not rely on an offchain orderbook to open or close positions.

Insolvency

Many existing perpetual swap platforms are not designed to prevent insolvency in a market meltdown or run-up. The Levana Well-Funded Perps Model is designed from the ground up to only enable positions to be created where locked capital ensures the platform will always be able to distribute assets to winning positions.

Hard to kick start new markets

Most perps platforms have difficulty adding new markets because of the high capital requirements of new markets. If a perpetual swap liquidity pool targets a 10%-20% utilization ratio, then in order to open $1M of positions, $5-$10M of capital is required. Levana Perps targets an LP utilization ratio above 50%, meaning less capital is required to start a new market and lower fees can be offered to traders.

Contagion risks of LPs

Some perpetual platforms use a pool of varied assets (Or a risk fund covering multiple markets) consisting of popular cryptocurrencies and stablecoins to act as the liquidity pool traders borrow against. The benefit of this approach is a partial solution to the capital inefficiency mentioned in the previous section. The disadvantage is the contagion risk of a single or multiple asset collapse within the liquidity pool. When liquidity providers are forced to be exposed to all assets in a pool, it can be unclear exactly what risks the LP is being exposed to.

Imagine if a pool targeted a 10% composition of a fictitious coin “Hamster Coin”. Now imagine that an exploit suddenly caused Hamster Coin to drop to near $0. Initially the pool will drop in value by around 10%, giving a haircut to all liquidity providers.

But it gets worse! The pool will attempt to rebalance the falling asset back to 10%, which opens an attack vector for arbitrageurs to flood more and more Hamster Coin into the basket. Depositors of the worthless Hamster Coin will now own a disproportionate amount of LP tokens in the pool which can be redeemed for more valuable assets.

This contagion risk prevents these platforms from freely taking on new, maturing markets. By siloing liquidity, Levana Perps can safely launch new markets without the fear of negatively impacting existing markets or liquidity providers. In addition, liquidity providers can have granular control over which markets they want to contribute to.

Cascading liquidations

Many existing perpetual swaps suffer from cascading liquidations. A cascading liquidation is when one position opening or closing on the exchange can cause another position to be forced into a liquidation, which in turn causes more to be closed, similar to a domino effect.

Levana Perps removed the need for an internal market price, thus preventing multiple attack vectors, both from malicious actors and from strong internal market movements negatively affecting open positions.

High/inflexible fees

The majority of the existing perpetual swap platforms in the market charge continuous fees based on the entire size of the leverage position. Levana Perps offers traders the ability to customize their fee structure based on the max gains associated with their position. A trader can add an automatic take profit to their position in exchange for a significant reduction in fees.

Because fees are flexible, many new strategies can be applied to this model that were not possible before, such as market neutral AMM liquidity providing and market neutral staking.