You want to leverage your trades? However, you don't want to take the custodial risk of traditional exchanges? In this post, we are breaking down different margin trading platforms on Ethereum for you, look into different features and developments.
Leveraged trades on Ethereum? Before we break down margin trading platforms on Ethereum, let's take a look at the basics first. 👀
Or skip the basics and go straight to Margin trading platforms on Ethereum.
What is margin trading? How can I use leverage?📈
Margin trading is trading with borrowed money, resulting in leveraged payouts.
_Let's assume you buy 1 ETH at a price of 100 USD. The next day, you sell your ETH at the price of 110 USD and therefore pocket a 10% profit. Easy._💰
Now let's leverage your trade with a leverage of 2 to take home double the profit.
You take your own 100 USD and borrow an additional 100 USD from a friend (or from a bank, exchange, lending pool etc.) and buy 2 ETH (for 200 USD).
_The next day you sell 2 ETH at 110 USD/ETH, give back 100 USD (usually plus additional interest) to pocket 120 USD, a 20% profit._💰💰
Et voilà, you **margin traded **with a leverage of 2x. The borrowed 100 USD is the 'margin' and is used to lever your profit.
Obviously, leverage can work against you!😐
Margin trading also leverages your loss📉
Let's assume, in our example above, the ETH price drops to 90. Now, you might be forced to sell 2 ETH and give back 100 USD margin. That leaves you with 80 USD: A 2x loss.
Therefore, we should note that the more money you borrow, the more risk you take.😈
However, for many people it is still interesting to trade on margin as it helps to increase potential gains in markets with low volatility or in the short-term.
Margin trading platforms on Ethereum
As we saw above, margin trading consists of two parts: The margin and the trade. Therefore, margin trading platforms usually differ in:
- 📊 Costs: Fees, margin interest rate & price/liquidity
- 🛠️ Trading tool design and features
- 🛡️ Security
This post won't be looking to deeply into costs as they often change. We recommend checking out tools like LoanScan.io and debank.com for historic rates and debt ratios.
As for security, we should note that any smart contract based platforms bears potential risks such as smart contract ownership, likelihood of vulnerabilities, financial risks resulting from the architecture and others. We recommend checking out Consenys' DeFi Score and audit reports of the relevant DApps.
Now, let's finally look into current available platforms below. 🤿
dYdX --- as well as all the other platforms below --- lets you borrow tokens just like Compound. However, their formula of calculating interest rate as well as supply & demand differ.
We suggest you to take a look on Loanscan.io to see which historical and current interest rates fit your need. Advanced users can check out and compare dYdX' interest rate calculation dYdX here and Compound here (under InterestRateModel).
dYdX offers margin trading with a leverage of up to 5x for ETH, USDC and DAI token pairs.
To understand how it works, let us walk through an example of trading 1 ETH with 2x leverage below.
To leverage our 1 ETH 2x, we enter a Position Size of 2 ETH and Leverage of 2x.
The interface now shows a warning (Insufficient account collateralization. Deposit additional funds to make this trade) as well as the amount of ETH we need to deposit into your dYdX Balances (here: 1.036 ETH).
After depositing 1 ETH and waiting a minute or two, we can trade a position size of 2 ETH.
We are now profiting from increasing prices in a 2x fashion. However, we might also lose with the price falling until we lost all of our 1.036 ETH margin deposit.
Leveraging your ETH LONG position by depositing ETH is called an isolated margin in dYdX. Isolated, because you can lose your ETH deposit, but nothing else. 🤷
Cross Margin Trading
If you have more tokens already deposited, you can open a Cross Margin which uses USDC and DAI balances in addition to your ETH balance. In this trade type, your account balances will change based on your trade's performance.
If you have --- for example --- 1 ETH and 100 USDC in your dYdX balance, your trade borrows DAI and sells it for ETH under the hood.
Note that any asset in your account will act as collateral. And any positive account balance conveniently earns interest.👍
In the same fashion as above we can take a short position, profiting from decreasing prices. In that case we would need to deposit DAI instead of ETH into the dYdX account balance.
Nuo is similar to dYdX in that it allows you to trade with a leverage of up to 3x. Besides ETH, DAI, USDC Nuo also offers MKR, WBTC and SAI token pairs for 3x and a lot more with 2x leverage (LINK, SNX, REP, ZRX, BAT, KNC, TUSD).
To trade ETH with 2x leverage on Nuo you choose a pair and leverage ratio, and just like on dYdX you can take both long or short positions.
While dYdX offers unlimited duration (at least to non-US based users) Nuo's trades expire after a maximum of 90 days.
Let's look into the trading interface & features.
Unlike dYdX, Nuo currently offers Take Profit orders that help you automatically close a trade when a certain price is reached. Similar to dYdX you will find an option to add a Stop Loss.
On the left side of the trading interface you find the option to view your trade's hypothetically past performance. A nice tool to help you make a decision on the trading parameters.
While dYdX had the single-collateral 'Isolated Margin' and multi-collateral 'Cross Margin Trades' Nuo only offers a single-collateral trade. However, here you can freely choose the collateral token as well as the token being paid out when the trade closes.👍
As for settlement, Nuo will fetch the best prices for Entry Price and Liquidation Price across Kyber Network, Uniswap, Oasis & 0x exchanges, promising good prices.
DDEX offers margin trading with a leverage as high as 5x just like dYdX.
Offered pairs include ETH-USDT, -USDC, -DAI and WBTC-USDT, HBTC-USDT.
When entering a trade amount --- i.e. dYdX' "Position Size" --- the interface will conveniently walk you through borrow and trading. 👍
As mentioned above, the underlying lending pools and architecture result in different borrowing interest rates. We suggest to compare, before you trade.
What sets DDEX apart is the limit order feature that lets you define a price at which your trade gets executed. Similar to Nuo and dYdX, DDEX also allows you to set Stop-Loss orders.
A small missing feature, that some people might bother is, that you can't set a maximum slippage.
Fulcrum is built by the bZx team and has been discussed a lot lately based on issues with liquidity. Similar to the platforms mentioned above, you can trade a number of tokens including ETH, WBTC, Link, ZRX and KNC with leverage up to 5x.
Fulcrum's margin trading functions are temporarily disabled until an audit and new version goes online.
Platforms on MakerDAO, 0x & Compound
Since lending (see DeFi Explained Part 1) and trading interfaces already exist on Ethereum, DApp developers can simply use those to build their own margin trading tools.
0x Project even offers a guide on how to use their trading API in combination with Compound's lending capabilities here.
Another one is InstaDApp which lets you leverage your existing MakerDAO position.
Current margin trading platforms cater to a small group of specific crypto users who will choose their favorite platform on interest rate, fees and liquidity. We have seen that specific features such as order types are simply added over time.
Security research and experience over time will tell which projects win most users. Currently dYdX has $8.25M outstanding debt, while Fulcrum has $2.77M compared to $102M in MakerDAO and $24M in Compound (see). Will liquidity accrue in Compound? Or will trading-centric platforms such as dYdX manage to pool a lot of tokens?
We found that an easy-to-use interface can make a world of difference in margin trading. However, none of the platforms above currently have a one-click trade experience but still require separate transactions for deposit/borrow and trading.
If you read this article in a few weeks, a lot will probably already have changed and improved. We are curious to see that development.
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