The Defrost V2 is a new-generation decentralized leverage trading and yielding protocol, built on Avalanche. It efficiently allows users to participate in leverage trading or earn leveraged yields in a trustless and user-friendly way.
The protocol allows users to tailor their leveraged trading strategies, according to their risk preferences, in a trustless and decentralized way, while preserving the friendly trading experience provided by centralized exchanges.
Through Defrost V2, one may either contribute their assets in the lending pools, powered by our well-established super vaults, to earn passive yields; or participate in leverage trading by longing or shorting crypto-assets, with an especially user-friendly interface.
The Defrost V1 is a decentralized protocol that allows you to utilize liquidity pool (LP) tokens and other pool tokens from various Avalanche and cross-chain protocols as collateral for generating H2O, a soft-pegged stablecoin native to the Avalanche ecosystem.
The smart contracts in Defrost V1 are still working but all minting and incentives in Defrost V1 have been terminated.
"Leverage trading", or “margin trading,” means borrowing assets to take on long or short positions, using their own assets as collateral for borrowing.
Margin trading allows traders to use greater funds, increasing their positions without needing as much underlying capital. Essentially, margin trading amplifies trading results so that traders can realize bigger profits on successful trades. The catch is that if the value of the collateral falls below a predetermined threshold, their position gets liquidated. (Unless they provide more collateral, of course.)
Lenders meanwhile earn interest for allowing traders to use their assets.
A super vault is a yielding mechanism introduced, tested, audited and popularized by the Defrost V1. It is an enhanced yielding contract with 'lose-nothing-and-earn-more' features. When you commit your tokens to Defrost, the super vault collects both fees and rewards from the original interoperated platform, where your contributed assets were staked.
In super vaults, idle assets not yet utilized to power margin trading in lending pools are deposited in interoperated DeFi platforms — aka projects that are cooperating with Defrost — to continuously accrue interest and mining rewards.
When traders open their positions, an equivalent amount of assets is withdrawn from other yielding positions and lent to the margin contract. Normally, the rewards accrued in the margin contracts will be higher than those from other protocols, leading to higher rewards being passed into the super vaults.
No. You can withdraw your funds in Super Vaults any time, after providing liquidity.
Please note that when there are leverage traders, some of the funds are lent to these traders. Therefore these assets are withdrawn from the Super Vaults and recorded as debts of traders in smart contracts. The same cannot be withdrawn from Super Vaults unless they are paid back. It is a mechanism similar to other borrowing and lending protocols like AAVE and Benqi.
The UI will show how much liquidity there is left to borrow/withdraw at that time.
Leverage trading (margin trading) is not complicated. It is a trading strategy that simply borrows money from other parties, and buys more underlying assets with the borrowed funds (if you are taking a long position) or sells them first intending to buy back at a cheaper price later (if you are taking a long position).
Currently, Defrost V2 supports up to 5x leverage when longing or shorting whitelisted crypto assets.
Please keep in mind that you always need to pay back the borrowed funds. You may actively close your position or passively get liquidated if the market makes an unfavorable move to a certain threshold.
In Defrost V2, all this is coded in smart contracts.
Unlike perpetual exchanges like DYDX or GMX, which build and incentivize their own liquidity for transactions, the Defrost V2 draws liquidity from other DEXes, like Trader Joe.
This means Defrost V2 does not need to build its own liquidity pools from scratch, which might be difficult if no adequate incentives are provided to the liquidity contributors.
Defrost V2 fully utilizes the well-established liquidity pools that power spot trades in major DEXs and build leverages for traders when longing or shorting crypto assets. Actual trades are done on the interoperated exchanges, rather than making synthetic positions.
Interoperated liquidity will help to smoothly bootstrap the leverage trading, while being more likely to provide higher liquidity and lower slippages for traders, further enhancing the user experiences when making margin trades on Defrost V2.
Unlike perpetuals which are often designed as synthetic products in DeFi, leverage trades in Defrost V2 are always fully collateralized.
In other words, when leverage traders long or short crypto assets, the smart contracts always borrow real money and do real trades, to back the trader's leveraged positions. The funds in the lending pools will be lent to acquire a certain amount of tokens from an exchange and increase the position size, providing an easier, smoother process than traditional decentralized leveraged trading models.
All trades and positions can be tracked on the Avalanche blockchain.
To make sure that the leverage traders can always repay their debts, Defrost V2 deploys liquidation contracts and sets the minimum collateral ratio. If a user fails to maintain the collateral ratio above the minimum requirement, a third party may liquidate his/her position and get some liquidation bonus. Whatever remains after liquidation will be refunded to the user.
The liquidation follows a similar process to closing a position. But it is triggered automatically and executed by a third party. There are incentives to the liquidator, therefore extra loss to the users that get liquidated.
The liquidation price is calculated based on whether you are longing or shorting an asset, the leverage you are taking and the price when opening the position.
Please note that the price is fed by Chainlink, rather than the DEX's spot price. Therefore, liquidation will not be affected by the short-time abnormality that may occur on DEXs like Trader Joe.
Collateral ratio = the value of collateral / the value of borrowing
The minimum collateral ratio is the minimum requirement that leveraged traders need in order to maintain their long or short positions. If the current collateral ratio falls below the minimum collateral ratio, the trader will get liquidated.
Yes. The Leverage Trading contracts in V2 were audited by Certik in September 2022. And the Super Vault contracts were audited by Certik in V1. Please check the audit reports here.