The Rise of Leveraged Trading: Exploring Decentralized Alternatives

Photo by Pierre Borthiry - Peiobty

Leveraged trading has attracted both experienced traders looking to maximize their potential returns and novice traders seeking to enter the financial markets with limited capital. The appeal lies in the potential for significant gains within short periods.

Grand View Research stated that the global leveraged trading market was valued at approximately $4.4 trillion in 2020 and is expected to reach $6.8 trillion by 2028, growing at a compound annual growth rate (CAGR) of 5.8% during the forecast period.

This rise could be credited to online trading platforms. These platforms offer leveraged products such as contracts for difference (CFDs), futures, and margin trading, which enables traders to speculate on various financial instruments with leverage.

Leveraged trading explained

Leveraged trading is a strategy that allows traders to gain amplified exposure to an asset using borrowed funds. It involves using leverage, which is essentially trading with borrowed capital to increase potential profits. In leveraged trading, traders can open positions that exceed their available capital, allowing them to control larger positions than with traditional trading. This can lead to higher potential returns, but it also comes with increased risks, as losses can be magnified as well.

What is decentralized leveraged trading?

Decentralized leveraged trading, on the other hand, refers to leveraged trading conducted on decentralized platforms within the realm of decentralized finance (DeFi). DeFi leveraged trading platforms aim to provide users with the ability to trade leveraged positions in a decentralized, permissionless, and non-custodial manner. These platforms are typically built on blockchain networks and operate using smart contracts.

The main difference between traditional leveraged trading and decentralized leveraged trading lies in the underlying infrastructure and the level of control and ownership. Traditional leveraged trading often takes place on centralized exchanges, where users deposit their funds and trade on margin provided by the exchange. The exchange acts as a central authority, managing the borrowing and lending of funds and maintaining custody of the assets.

In contrast, decentralized leveraged trading platforms operate through smart contracts that execute predefined rules and enable peer-to-peer trading directly on the blockchain. Users keep full control over their funds when interacting with smart contracts, removing intermediaries and the need for trust in a centralized entity. This means that they can trade leveraged positions without relying on a centralized exchange.

There are even more advantages offered by decentralized leveraged trading platforms. Some of which can be access to a wider range of assets and lower fees. They also offer the ability to vote for the platform's decisions through token ownership. Do keep in mind that decentralized leveraged trading platforms may face challenges with regard to liquidity, scalability, and smart contract security, which require careful consideration and evaluation by users.

Why people are leveraging their trades: The Benefits and Risks of Leveraged Trading

We can find the answer to this question by evaluating its benefits. Let’s assume that you have $1,000 and decide to try leveraged trading with a leverage ratio of 5x.

In the event of a successful Trade, the price of the asset you're trading increases, resulting in a profitable trade.

Initial Position: You use your $1,000 to open a leveraged position worth $5,000 (5x leverage).

The price of the asset increases by 10% while your position is open.

Since the price increased by 10%, your position’s value becomes $5,500 ($5,000 initial investment + 10% increase), making your profit $500.

Return on Investment: To calculate the ROI, we can divide the profit by the initial investment: $500 / $1,000 = 0.5 or 50%. So, your ROI here would be 50%.

In the event of an unsuccessful Trade

Now, let's consider a scenario where the price of the asset decreases, resulting in a loss.

Initial Position: Again, you open a leveraged position worth $5,000 with your $1,000 (5x leverage).

Price Decrease: The price of the asset decreases by 5% during your position.

Calculating a Loss: With a 5% decrease, your position’s value becomes $4,750 (initial position of $5,000 - 5% decrease). Therefore, you lost $250 ($5,000 - $4,750).

ROI: To calculate the ROI, divide the loss by your initial investment: $250 / $1,000 = 0.25 or 25%. So, your ROI in this scenario is -25% (a negative return indicating a loss).

Once we’ve calculated the profits from a successful trade, it’s clear why the instrument is appealing. Additionally, this example assumes a linear price movement for simplicity, but in reality, market fluctuations are more complex and unpredictable.

Important disclaimer: Leveraged trading can magnify both gains and losses. While higher leverage ratios offer the potential for larger profits, they also increase the risk of significant losses. You should always exercise caution, set appropriate stop-loss orders, and have a solid risk management strategy in place to protect their capital.

Some of the Decentralized Leveraged Trading Platforms I’ve Tested

There is an abundance of shady platforms on the market, so I’ve tested a few.

And a quick disclaimer, this list is in no particular order and you should always DYOR before choosing a platform, as this list serves as a starting point and not as a recommendation.

dYdX

dYdX is a leading decentralized trading platform that offers margin trading and perpetual contracts with leverage. It operates on the Ethereum blockchain and provides up to 10x leverage for various cryptoassets. dYdX offers a user-friendly interface, deep liquidity, and non-custodial trading, ensuring control and security over user funds.

Gravix

Gravix is a decentralized trading platform that allows users to trade cryptocurrencies, stocks and forex with leverage via long and short positions on both Venom and Everscale blockchains. At the core of the Gravix protocol are liquidity providers who act as market makers for all users. They allow traders to open positions on any asset at the current market price with a low spread. This means that traders can quickly and easily buy or sell any asset on the platform. It also connects to both Everscale and Venom (which is the first blockchain to be licensed by the Abu Dhabi Global Market (ADGM).

Perpetual Protocol

Perpetual Protocol is a decentralized exchange protocol designed for leveraged trading of perpetual contracts. Built on Ethereum, it supports up to 20x leverage on multiple cryptocurrencies. The protocol utilizes an automated market maker (AMM) model to ensure liquidity and allows users to trade perpetual contracts without the need for counterparties.

Leverj

Leverj is a decentralized leveraged trading platform that prioritizes speed, security, and transparency. Operating on the Ethereum network, it offers leveraged trading on various cryptoassets. Leverj combines off-chain order matching with on-chain settlement, enabling fast and low-cost trading experiences. The platform's Proof of High Leverage (PoHL) mechanism rewards users who maintain high leverage positions.

What now?

When you’re considering any leveraged trading platform, make sure you’re doing your due diligence. Evaluate factors like security, liquidity, fees, supported assets, and the platform's reputation. This list can act as a starting point, but it's crucial that you choose a platform that aligns with your specific trading requirements and risk tolerance.