The Basics: An Introduction to Kwenta

We’ll cover some fundamental concepts of perpetual futures trading in Web3, and the features available on Kwenta. By building a solid foundation of understanding in Kwenta’s flagship offering, users will be better equipped to employ perpetual futures in both simple directional trading, and advanced use of derivatives.

If you’re a DeFi power user or experienced trader already knowledgeable on these basic concepts, we’ll cover more complex concepts later. If you’re a beginner, or aren’t familiar with how Kwenta is different from other exchanges, this is for you.

What is Kwenta?

Kwenta is a permissionless, decentralized trading platform offering synthetic perpetuals and spot trading on Optimism L2. Users can trade a variety of assets against Chainlink oracle prices with up to 25x leverage.

Kwenta believes that everyone, everywhere should be able to access the same financial tools found on a centralized exchange with the benefits of DeFi. With Kwenta, you keep control of your assets, and enjoy the security and reliability offered by the Ethereum blockchain.

Why do I need sUSD?

Kwenta is powered by Synthetix, which provides liquidity on synthetic assets and perpetuals. Synthetix stakers act as counterparty to trades on Kwenta, allowing Kwenta to offer deep liquidity on assets which meet listing requirements.

If you don’t have sUSD, we’ll explain how to acquire it in the next section.

What is SynthSwap?

Kwenta SynthSwap is found in the “Exchange” tab, and makes onboarding to Kwenta hassle-free. With SynthSwap, users can exchange directly between any supported ERC-20, sUSD, or any synthetic asset on Optimism, all from one place.

By building on top of both 1inch and Synthetix, Kwenta SynthSwap is able to find users the best price on their exchange. Swaps that would otherwise require multiple transactions and manual routing are accomplished effortlessly in a single transaction. Why swap anywhere else?

How does synthetic leverage work?

While margin accounts in traditional finance offer leverage by letting traders borrow additional collateral, synthetic perpetuals simulate the gains and losses of larger positions without buying the underlying asset.

If a trader’s losses come close to the amount of collateral they’ve provided, their positions will be closed for a loss automatically.

Example:
A trader with $750 of collateral may buy 1 ETH at $1,500 by setting leverage to 2x. If ETH increases by 50% to $2,250, the trader gains that same $750, a 100% return on their collateral.

Likewise because the trader has only provided $750 of collateral, the trader can withstand about a 50% drawdown (minus trading and liquidation fees) before all the collateral has been lost, and the position is closed.

Why does my leverage change as the price moves?

Leverage is dynamic, and shows the relationship between your collateral, and your position size. When opening a position on Kwenta, the size of your position will stay the same when denominated in the underlying asset unless you close or modify, but the sUSD value of the position and your collateral will change with the market.

Example:
A trader with $750 collateral opens a 2x leveraged position for 1 ETH at $1,500. If ETH increases in value to $2,250, the trader has gained $750, totaling a full $1,500 collateral to back a position now worth $2,250. Since $2,250/$1,500=1.5, the effective leverage is now 1.5x.

In practice, this means that traders can use their additional collateral to open larger positions as their unrealized gains increase, but will lose available margin to account for unrealized losses.

How does Kwenta offer advanced order types?

Note: stop loss and limit orders are currently unavailable, and are scheduled for release soon.

Using Gelato keepers, Kwenta allows users to place orders which are executed automatically when future conditions are met. This allows Kwenta to offer stop loss and limit orders, giving users an experience that more closely matches a centralized exchange.

Limit Orders

A limit order opens or closes a position automatically at a specific price, and will remain open until the order is executed or canceled.

Example:
If ETH is trading at $1,700 and a trader wishes to buy 1 ETH when the price hits $1,500 the trader would deposit the appropriate amount of margin, and place a limit buy for $1,500. If the oracle price reaches $1,500 or lower, 1 ETH will automatically be bought.

Once a position is open, a limit sell order at $2,000 for 1 ETH can be used to close the position automatically when it reaches the desired profit level.

Stop Loss Orders

A stop loss order is similar to a limit order, but is used exclusively for closing positions that have moved against the trader. Stop loss orders are an important risk management tool, and prevent traders from being liquidated if the market turns against them.

Example:
If the trader in the previous example provided $750 in collateral at 2x leverage, but wanted to ensure they lose no more than 10% should the trade go against them, the trader would set a stop loss for 5% below the current price, at $1425. This allows the trader to protect the remaining 90% of their collateral, minus any fees or slight differences in the oracle price when the position closes.

Next Price Orders

Next Price Orders offer users an opportunity to pay lower base fees by choosing to execute the order at a future price. After at least one, but no more than two oracle updates, the order may be executed. Orders are typically executed by an automated keeper, for which the user pays a small fee.

To use next price, a user must pay a commitment fee, which is equal to the fee on a market order. This fee is refunded if the order is executed successfully. If an order fails or is canceled, the user will forfeit this fee, and pays only the lower fee for next price, and any dynamic fees applied to the order.

Although the user does accept some additional risk if the order should fail to execute or a large spike in dynamic fees occurs with the next oracle update, savings on next price orders are significant for some markets. Each trader should weigh the risks and savings when deciding between market and next price orders.

What is cross margin?

Note: cross margin accounts are currently unavailable, and are scheduled for release soon.

Cross margin accounts are a unique Kwenta offering which allows users to trade any market by depositing into a single account. By default, all Synthetix futures contracts are isolated markets, requiring users to deposit and withdraw separately for each asset they wish to trade. With Kwenta’s cross margin account, users can seamlessly trade different markets with fewer transactions, and less hassle.

Cross margin accounts also provide users with powerful risk management tools, letting users tailor each position to their personal trading style. Under isolated market contracts, users are forced to risk all of the collateral they deposit, and can only protect collateral from liquidation by completely withdrawing the collateral they wish to protect. With Kwenta’s cross margin accounts, users are able to select the amount of collateral they are comfortable risking when opening a position. Unused collateral will be protected if a liquidation should occur.

Have more questions?

Our community of traders and DeFi natives is here to help. Come drop in Discord and ask questions, post your trade ideas, talk about coding, or just hang out. We can’t wait to hear from you.