The case: Rage Trade
Ethereum merged. Now it's time to merge ETH liquidity.
At the beginning there was Ethereum, brought to us by Vitalik himself and his disciples collectively brought us Offchain Labs. While Arbitrum is doing a great job in creating a thriving DeFi ecosystem with multiple (unique) dApps, they miss a product which goes by the name of ‘Rage Trade’ and is one of the latest applications on this L2 scaling solution.
Rage … Trade?
This name may sound a bit odd but the mechanisms of this protocol are actually quite interesting. According to the team there are still inefficiencies in Uniswap V3 which can be optimized and lead to interesting strategies and simultaneously increase the capital efficiency and yield generation (in the form of fee collection) for the LPs. The team behind this project came up with a decentralized ETH perp exchange with two key innovations which are omnichain liquidity and yield generating 80-20 vaults.
Omnichain liquidity
It’s commonly known that liquidity is the lifeblood of DeFi and with the rise of multiple alternative blockchains we’re facing more and more fragmented liquidity. Rage Trade found an answer to this problem by using Layer Zero as an omnichain solution to attract liquidity from the chains supported by this cross-chain messaging protocol which currently are:
Arbitrum
Avalanche
Binance Smart Chain
Ethereum
Fantom
Optimism
Polygon
What’s cool here is that you can use your LP tokens that you’ve deposited into a protocol on another chain. Let’s say you’ve got some Sushi ETH-USDC LP tokens on Ethereum. The user can deposit his LP token on the source chain (Ethereum, Optimism, etc.). The source chain will send a message to the host chain (Arbitrum) to mint the equivalent of the deposited funds of the LP tokens into the pool of Rage Trade’s vAMM. This process happens in the opposite direction as well if a withdrawal will be initiated by a user. The process looks as follows:
80-20 Yield Generating Vault
The X*Y = K equation that’s being used in Uniswap V2 allows a users to provide liquidity along the whole curve from 0 to near infinity. Uniswap V3 offers a new primitive called ‘concentrated liquidity’ and is as the name suggest, liquidity provided in a certain range which is an upgraded functionality compared to Uni V2. This new primitive has the advantage that it’s way more liquidity efficient but can be quite harmful since almost 50% of the LPs on Uni V3 are making a net loss due to impermanent loss (IL). Rage Trade is built on top Uni V3 and the team has figured out a creative way to circumvent this IL with their 80/20 Yield Generating Vault. The idea behind this 80/20 breakdown is that 80% of the deposited funds won’t be utilized by Rage Trade for the liquidity provision of the Rage vAMM but will still earn their regular yield from the source chain. The remaining 20% will be deposited in the Rage vAMM concentrated liquidity pool to provide deep ETH liquidity and effectively generate a Uni V2-like revenue stream. While retaining the benefit of your funds in the 80/20 vault, your whole deposit will be earning yield from all these sources:
LP Fees from the original platform (Sushi, Curve etc.)
Fees from the Rage Trade platform
RAGE token
In return the user will receive an ERC-20 token as proof of ownership of the funds deposited in the vault. By using this method whereby they use liquidity from other protocols they effectively allow users to recycle liquidity, hence the term recycled liquidity.
Mechanics of the 80/20 vault
Since the price of Ethereum is volatile, LPs definitely will suffer from Impermanent Loss, so what is Rage Trade’s approach to this?
The vault rebalances on a daily basis and takes three steps:
Withdraw LP position
Deposits profits or withdraws losses into original pool
Redeploy 50/50 liquidity
If the price of Ethereum goes up, the amount of ETH in the pool declines while the USDC in the pool increases and the same applies to the other way around as well.
If the amount of ETH in the vault increases, the vault is taking the opposite direction of the trader and effectively is shorting ETH, if the price of ETH goes down, the vault goes long on ETH. The further the price deviates from the original deposit, the larger the divergence within the vault becomes. The subsequent result is that LPs would have the same losses as if they were providing liquidity in concentrated Uni V3 ranges.
If the vault totals an accumulated perp position of over 20% in USD value, the vault will have a kind of ‘reset’. The vault will start to slowly unwind its position while minimizing losses, subsequently recalculate the value of the vault and thereafter deploy the 20% again as Rage liquidity. By initiating this form of reset, the maximum amount of capital that could be lost to the divergence is around 20% since the other 80% in the vault is getting the regular yield from the original platform as LP token.
Note: If you’re just depositing LP tokens in the 80/20 vault you’re not subjective to the risk of being liquidated.
ETH perp exchange
The Rage Trade vAMM at its core is an AMM with deeper ETH perp liquidity pools due to concentrated liquidity facilitated by Uni V3 and omnichain liquidity. However, there’s a challenge for on-chain exchanges since there's an imbalance between the funding rates of CEXs and (other) decentralized exchanges. Decentralized exchanges often fall victim to funding rate discrepancy due to relatively low liquidity on these platforms and arbitrage bots which are taking advantage of the differences between exchanges. Funding rates are a payment mechanism to sustain leverage trades for both long and short sellers in which they pay each other in certain circumstances. If the current market price is higher than the index, the ones with a long positions will be paying a small premium to the short sellers (which applies the other way around as well).
The team came up with these measures to combat this problem. Rage Trade combines the TWAP of both the perp and spot prices every second and to track the funding rate development of CEXs as close as possible, Rage Trade has implemented three measures:
The aforementioned ‘traditional’ manner of determining the funding rates
Chainlink oracles with a direct data feed from Binance
Manual funding rate update via governance (this would only happen as some extreme outliers would take place)
If a user leveraged up and happened to be liquidated, there are some measures in place to prevent bad debt for the protocol. The process looks as follows:
It’s pretty straightforward, if the market moves in the opposite direction you need to post more collateral else you’ll get liquidated. If your position will be less than 75% of the required margin, the whole position will get liquidated. If it’s more than 75% of the required margin, then ‘just’ 50% of the deposit will be liquidated. If there’s a unique case in which a real degen is liquidated and his collateral will be under <0.0, there’s the insurance fund which will step in and compensate the margin difference.
Tokenomics
To be a sustainable protocol and have a viable future, the protocol will have 3 methods to generate its revenue stream:
Incur a 10% cut on the yield generated from the LP tokens in the 80/20 vault
A small trade fee of 0.05% * position size for LPs
A small trade fee of 0.1% * position size that’s happening on the protocol
As of the time of writing, the tokenomics are still under construction, however you might want to deposit funds in the 80/20 vault. Why? According to trustworthy sources the LPs in the vault will be eligible for an 🪂 - heard it here first.
Roadmap
The future is looking quite bright for the protocol, I can’t share too much about this since it’s confident for now, so effectively you’ll be getting DN.
Backers
There are some pretty dope funds that are backing Rage Trade and some of the names include:
If you think the involved funds are interesting, let’s take a look at the list of angels:
Thanks to BD Viperr for providing feedback on this article and sharing insights.
Disclaimer: Nothing in this article is financial advise and solely serves educational purposes. As of the time of writing, the author isn’t in possession of Rage tokens however this might change in the future.