How does Degen Protocol’s Margin Trading Work?

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How does Degen Protocol’s Margin Trading Work?

May 19 2021

Image: Andrii Chagovets / Adobe Stock

In brief

  • The DeFi sector attracted plenty of people as it exploded over the last year, significantly boosting the use of DEXes.
  • However, it still lacked decentralized margin trading, until Degen protocol brought it.
  • Degen’s method of operating if not overly complex, but still quite innovative and advanced.

Degen protocol is a young DeFi protocol becoming one of the more popular and highly important projects of the sector.

Margin trading is a big part of the trading industry across the world. The ability to borrow money from the platform you trade on and invest more than what you personally own can offer massive benefits if you know how to use the upcoming opportunities properly. Of course, margin trading still comes at an increased risk, so it is only recommended for experienced investors and traders who know what they are doing.

With that said, margin trading has been a part of the crypto sector for a long time now. However, only if we are talking about the centralized part of the sector. In other words, it was available on centralized exchanges.

With the surge of the DeFi sector in 2020, which has continued well into 2021, decentralized exchanges exploded as well, becoming a lot more competent and reliable. They were able to solve the liquidity issues, list many new altcoins that offered all kinds of opportunities and were, therefore, in high demand, and more. As people started switching to DEXes, one project managed to find a way to provide them with further incentive, and it did it by allowing decentralized margin trading in the DeFi sector. That project is, of course, Degen Protocol, which operates on both Ethereum and BSC.

What Is Degen Protocol and How Does It Work?

As mentioned, Degen is a decentralized protocol for margin trading with liquidity providers. It is very customizable, to the point where users can change anything, including any LP, pairs, leverage, and more, depending on their preferences. The protocol has split its users into four key roles that include:

  • Pool creators, who create new pools
  • Lenders, who provide funds for the pools
  • Traders, who borrow funds from the pools for trading
  • Stakers, who use their existing funds to stake DGN tokens

As for its margin trading, it is not that complex, but it is still quite interesting, considering that it brought something to the decentralized finance industry that no one else could bring before.

Essentially, when a user opens a position, a commitment and a liquidation fee get frozen in their balance. The commitment size will depend on the leverage that the user selects. If the position ends in a loss, and the loss is bigger than the size of the commitment, the smart contract will allow anyone to liquidate the position and take the liquidation fee.

Meanwhile, the user can add more commitment to their position to stop this from happening at any time, provided that they choose to do so.

Users also get to use stop-loss or take-profit functionalities when they are opening their position to limit the losses or secure the funds at a certain price. That way, they get to reduce the risks, which is of great benefit for highly volatile assets. The liquidation fee is also paid here, so the general mechanics doesn’t really change.

Now, even though Degen is available on ETH and BSC alike, there are some small differences between the two. For example, on Ethereum’s network, Degen takes a trading fee, which can be paid in any token. However, it will always be swapped directly to ETH.

On BSC, Degen also takes a trading fee that can be paid in any token, but it will always be swapped to DGN. However, if users pay fees in DGN directly, they can save up on gas fees for swapping, which continues to drive buy pressure and results in a positive feedback loop that boosts DGN value.