What is it?
Leveraged trading, or margin trading is the activity of holding a long/short position on an asset, whilst increasing exposure to its price, by using funds borrowed from the broker as collateral. In DeFi, the role of the broker is performed by autonomous market makers (AMMs) such as those in liquidity pools. This type of trading can be undertaken on various decentralised exchanges (DEX’s) such as DyDx, MCDEX and Fulcrum.
These tokens are represented by ERC20 tokens on the Ethereum network. These peer-to-peer trading platforms provide a better UX, greater security and more flexibility. Centralised exchanges function via a centralised organisation and often lead to security concerns and hacks. This was especially sparked by the hack of QuadrigaCX that saw at least $140 million of crypto assets, never to be solved. DEX’s aim to solve these problems through trust-less, peer-to-peer platforms.
How do I trade on them?
It is very simple to start trading on DEX’s. Simply open an account on any exchange, connect your crypto wallet on MetaMask or other Web 3.0 platforms, and trade. Both DyDx and MCDEX allow up to 10x leverage trading on ETH perpetual futures using ETH as collateral. This can generate large opportunities for profit, provided risk management is undertaken correctly. However, whilst it is likely more and more DEX’s will offer leveraged trading, owing to their novel status and liquidity issues, it may be some time before others follow suit.
For example, LEVERJ, still in its test net, will soon offer decentralised leveraged trading of up to 100x.
There are naturally many risks associated with leveraged trading. Since the funds used to trade with are primarily borrowed, the user is much more exposed to price volatility, and fluctuations are more likely to result in liquidation. With effective risk management, the damages of leveraged losses can be limited, for example by using stop losses to close the position at a certain point.
It is also important to understand the AMM and how it relates to liquidity. An exchange with inadequate liquidity will result in low trading volumes.