Kwenta Lists Debt Ratio Futures Market
0xC065
August 31st, 2022

Kwenta is offering a new tool for SNX stakers. A unique perps market, $DEBT-PERP, is joining the growing list of supported cryptocurrencies, commodities, and forex pairs available for leverage trading through Kwenta on Layer 2 Optimism. Please be aware that hedging via $DEBT-PERP is experimental, comes with unique risks, including but not limited to the risks described here, and performance against an individual debt position is not guaranteed. Please familiarize yourself with and understand the risks of SNX staking and using perps markets before utilizing this tool.

What is $DEBT-PERP?

The $DEBT-PERP market tracks a simulated SNX stakers debt position, increasing and decreasing at the same rate a stakers debt would change relative to their initial debt. This is accomplished using the existing Chainlink oracle which tracks the SNX debt ratio, using this ratio as the sUSD value of a perps market asset.

Note that this not for the total amount of debt, but for the debt-share relative "price" (debt inflation / deflation)

The primary underlying activity which changes the $DEBT-PERP price is the aggregated profitability of all synth traders. If synth traders make money, $DEBT-PERP will increase. If synth traders lose money, $DEBT-PERP will decrease.

What is this market used for?

Although it is possible to trade this market like any other, the market is primarily a tool for SNX stakers to hedge their debt. As the debt pool fluctuates over time, stakers owe more or less depending on this movement. If you’re an SNX staker and want more information on the debt pool and hedging, please begin here or join the Synthetix discord for assistance.

Since this tool matches an SNX stakers debt position’s fluctuations, a staker opening a long equal notional size $DEBT-PERP position to their SNX debt position will incur no net profit or losses from delta. This ensures that stakers always have access to the necessary sUSD to manage, or close their debt position with Synthetix.

Traders may also choose to go short if they wish to collect funding, or take a position which implies that spot and futures traders in aggregate will lose money.

What is the advantage of $DEBT-PERP over other debt hedging strategies?

There are two primary advantages to this market.

Neutral Delta

$DEBT-PERP is a delta neutral hedging strategy, as described in the previous section. While some stakers choose to accept some exposure to $ETH or other asset prices, a delta neutral strategy minimizes the risk associated with swings in the market. dSNX is a similar tool which offers a delta neutral hedging strategy.

Capital Efficiency

The second, and most unique advantage is that $DEBT-PERP offers up to 10x leverage. Increased capital efficiency allows stakers to allocate as little as 10% of their debt as collateral, while still remaining fully delta hedged. This leaves up to 90% of your collateral free for use in other strategies, such as trading, depositing in to lending markets, yield vaults, etc.

What are the associated risks?

Using the $DEBT-PERP market to hedge SNX staking debt comes with a unique set of risks, and may include risks not covered in this blog.

Funding Rate

Holders of perps positions either pay or receive a funding rate depending on the market skew. Since the use primary use case of the $DEBT-PERP market requires stakers to take a long position, it is likely that funding will remain positive, meaning that stakers will make regular payments in order to hedge their debt using this tool. The funding rate is calculated by Synthetix as follows:

maxFunding * skew / skewScale

Using current parameters with maxFunding at 10% per day, skewScale of 5M, and an open interest (OI) cap of 1M sUSD, users could pay up to 2% on their notional positions per day if the market is fully utilized. Although these initial defensive parameters may be changed over time, and actual utilization could be considerably lower, it is possible for stakers to realize a considerable net loss after their staking yield, or even lose the entirety of their collateral to funding over time. Stakers should carefully monitor their positions and the market’s funding rate.

Liquidation

Liquidation is a risk of every leveraged position, and liquidation risk increases with the amount of leverage used. For example, a staker who maximizes their capital efficiency by taking a 10x leveraged long position using 10% of their debt is at risk of liquidation if their debt and the $DEBT-PERP position decreases by a little less than 10%.

Although unrealized PnL from a staker’s $DEBT-PERP position should be considerably offset by reduction in their sUSD debt, liquidation fees can result in additional losses if the positions should be liquidated. Additionally, a liquidated position becomes unhedged until a new hedging position is opened. Although sudden 10% moves in $DEBT-PERP should be a rare occurrence, stakers should carefully monitor their positions and add collateral or close positions before liquidation occurs.

Fees

Due to the $DEBT-PERP market using defensive initial parameters, fees on the $DEBT-PERP market are higher than average at 60bp. The purpose of these fees is to combat front running and exploitation of the $DEBT-PERP market.

Due to a lower risk of front running, Next Price fees have been set at 15bp, about 75% lower than market fees. Since stakers are unlikely to be actively trading this position, it is highly recommended that stakers use Next Price orders to minimize their costs in opening and closing positions unless there is an urgent reason to modify a position, such as a position nearing liquidation.

Are stakers backing their own hedging positions?

Yes, since stakers back the debt pool, and DEBT-PERP positions are a part of global debt, technically stakers are the counterparty to their own DEBT-PERP positions. Fortunately, the system is not at risk of blowing up. Due to the small $1m OI cap compared with the size of global debt, which is over $100m, and the relatively large move in $DEBT-PERP that would be required to trigger an oracle update, the protocol is in no danger of breaking due to this product.

Although it’s true that $DEBT-PERP as a hedging solution cannot scale due to these limitations, this tool is not appropriate for every staker. In practice, Synthetix stakers will continue to use a variety of hedging strategies, and implement these strategies using different tools.

Other Considerations

Part of the ethos of the Kwenta DAO is also to provide free and open access to financial tools. Although the DAO aims to provide as much information as possible about the financial tools found on Kwenta, there may be unforeseen consequences and risks of using these tools, and users may need to do additional due diligence to find an investment strategy which suits their needs. For this reason, the information found here should not be considered a complete guide for hedging debt in a Synthetix staking position, nor an endorsement of a particular strategy.

The $DEBT-PERP market is an exciting experiment in offering a market which is not tied to an underlying asset, and innovating in different types of use cases for derivatives. We are excited to watch this fascinating product be tested and refined, and look forward to other new and interesting offerings.

📝Contract Specs

DEBT_RATIO-SUSD PERP

  • Underlying Asset: $DEBT-RATIO

  • Settlement Asset: $sUSD

  • Open Interest (OI) Cap: 1M sUSD

  • skewScale: 5m

  • Expiry: Perpetual

  • Maximum Leverage: 10x

  • Liquidation Price: The DEBT RATIO Chainlink price oracle

  • Funding: The Funding Rate applies to open positions on Perpetual Futures contracts. A positive rate means longs pay shorts, and a negative rate means shorts pay longs. The funding rate is calculated in real-time every time a position is opened, modified, or closed and is charged at the exit of a trade.

  • Contract Address: 0xd325B17d5C9C3f2B6853A760afCF81945b0184d3

  • Market Fees:

    • Maker: 60bps

    • Taker: 60bps

  • Next Price Fees:

    • Maker: 15bps

    • Taker: 15bps

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