Leverage Tokens vs Perps

Video Transcript

Ever wondered how leverage tokens stack up against perpetual contracts for onchain trading? In this video, we'll break down the top three advantages of leverage tokens over perps:

1. Lower costs and fees. Leverage tokens are generally cheaper. Like, a lot cheaper.
2. Streamlined experience. The trading process is streamlined and simple.
3. Liquidation protection. They offer built-in liquidation protection. 

Let’s jump in.

1) Costs and Fees

Do you know what you’re paying for leverage? The true cost of onchain leverage can be surprisingly hard to find and even harder to track once you do. 

Leverage tokens cut through that black box with a transparent cost structure consisting of two parts:

• Fees charged by Index Coop
  • These are the straightforward fees, including mint and redeem fees, plus an annual charge that varies depending on the product.
• Borrowing fees on Aave (Cost of carry)
  • This is the dynamic part. The 'cost of carry'—essentially the interest you pay for borrowing—depends on how much borrowing demand there is on Aave V3.

In contrast, perp traders face a variety of fees,  the most notorious being funding rates. Think of funding rates as adjustable interest fees you pay to keep your position open—they can fluctuate wildly depending on market conditions. During periods of high demand, these rates can skyrocket, eating into your profits or even flipping a winning trade into a losing one. 

Take May 2024, for example. Onchain funding rates for a 3x ETH position spiked to over 260%, an absolutely eye-watering fee. Meanwhile, the cost-of-carry for ETH3x, the leverage token, topped out just over 40%—a whopping 6.5x cheaper than perps! This isn’t a one-off, either. Historically, leverage tokens tend to be way cheaper than perps. The cost of carry, tied to Aave’s rates, is usually lower and more stable than the funding rates of perps. 

And that’s not all - Perps platforms have a number of fees beyond the funding rate including borrowing fees and open/close fees which—unlike Index Coop’s fee—are often charged on the entire size of the open position, not just the initial amount you put in. 

Over time, this difference in costs can make a significant impact in what you take home at the end of a trade.

2) Simplified Experience

Ever opened a perp platform and thought “where do i even start?” 

These platforms, while impressive, can overwhelm with complex charts and interfaces. Combine that with the need to manage collateral, monitor market conditions, and manually adjust positions, and it’s easy to see why perp trading can feel intimidating. Leverage tokens from Index Coop strip away that complexity. They simplify trading by letting you choose a market direction and swap into the corresponding token. After you purchase, the token automatically rebalances to maintain your leverage. This frees you up to focus on your overall strategy.

This streamlined, hands-off approach isn’t just about convenience—it’s about reducing real headaches that come with managing leverage. Whether you’re a seasoned trader looking to streamline your operations or a newcomer who’s looking for a straightforward trading tool, leverage tokens might offer a simple, effective choice. 

3) Liquidation Protection

One of the biggest fears when trading with leverage is the dreaded liquidation. Imagine this: the market moves against your position, and suddenly you're hit with a margin call or, worse, your position is liquidated. It's not just a bad experience—it can wipe out your money in an instant. Managing this risk typically requires monitoring market conditions like a hawk.

Enter built-in liquidation protection with leverage tokens. Here's how it works:

Leverage tokens automatically adjust their leverage ratios to maintain a safe collateralization level. When the market moves against you, the token proactively rebalances itself, reducing leverage to protect you from sudden liquidation. This built-in mechanism continuously monitors and adjusts your position behind the scenes, so you don't have to worry about margin calls or scrambling to add more collateral. The token does the heavy lifting, allowing you to benefit from leveraged exposure while minimizing the risk—all without any manual intervention on your part.

Contrast this with traditional perp platforms where you're responsible for managing your collateral and margin requirements, and if the asset price drops significantly, you could be liquidated.

But what about extreme market conditions?

In the event of a big market crash, leverage tokens have an additional safeguard known as the Ripcord function. Think of the Ripcord function as an emergency brake that can be pulled during sudden market drops. If the leverage ratio moves dangerously outside its safe range, the Ripcord function can be activated to aggressively deleverage the position and protect it from liquidation. This function is publicly callable and incentivized, meaning anyone can trigger it when necessary, ensuring a rapid response during volatile times.

While no system can completely eliminate risk—liquidations are theoretically possible—leverage tokens offer a level of protection and peace of mind that's hard to find with traditional trading platforms. 

Conclusion 

Navigating the world of onchain leverage doesn't have to be complicated. By automating complex processes and helping to manage risk, leverage tokens let you focus on what matters—your trading strategy.

Try the Leverage Suite today at app.indexcoop.com/leverage

If you have any questions or experiences to share, feel free to leave a comment below or hop into the Index Coop discord.

As always, none of this should be considered financial advice and you should do your own research and come to your own conclusions regarding what’s right for you. Be sure to read through our disclaimers at the end of the video.

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