DeFi (decentralized finance) lending has proven its case. Eliminating the middleman in this type of financial transaction can be done, and done in a way that benefits both transacting parties. In practice, this means lenders can bypass the bank and increase their earnings, and borrowers can gain access to the funds they need, even if they don’t meet the criteria of the middleman. However, the industry is still young and requires additional applications before it is entirely competitive with traditional offerings available to the consumer today.
The fact is that the world is becoming increasingly overcome with tokenization, and the industry is already preparing for a future where more assets have a digital counterpart. Therefore, it is only a matter of time before trading itself becomes largely decentralized. Consequently, use cases such as margin (or leveraged) trading, common in traditional finance, need a decentralized counterpart.
In margin trading, debt (or borrowing assets) can be used by an investor to execute larger trades. With this type of investment, some level of customer protection is necessary to protect the lender. Since blockchain technology is anonymous, the same level of knowing your customer is not maintained.
Defining the solution looks at a lender’s ability to provide liquidity and a trader’s capability to use the platform to open leveraged trading positions. To make this a reality, Primex Finance has defined a solution for dynamic risk profiling based on the on-chain historic trading data that allows lenders to provide liquidity and traders to use it in margin trading positions.
Addressing industry-wide concerns
To provide users with the optimal solution, the protocol looks to several key features to differentiate itself from current market offerings.
Common in the industry today is market fragmentation and a limited number of assets available on centralized exchanges, two problems solved with the provision of cross-DEX trading, which opens up the number of leveraged positions in which users can engage. Since the protocol is not limited to one exchange, it instead considers available liquidity amongst other factors.
Traders may also take part in opportunities for yield farming backed by margin trading performance, a direct result of profitable trading producing higher returns that can be shared, boosting lenders’ earnings as well.
Providing an opportunity to traders is the elimination of collateral requirements when opening a position. Instead, traders only need to lock the deposit, not requiring transfer to an external wallet. When liquidation occurs, locked assets are then transferred to the protocol’s total value locked. Each trader then interacts with the DEX through a smart contract rather than their personal wallet.
Further protecting traders is an AI-based trader scoring solution, first made available with the second version of the protocol. The protocol will evaluate traders continuously, scoring each one into an available bucket and offering potential opportunities to save their position if they are able to survive high volatility.
Other considerations come down to risk management across different trading pairs, other traders and assets. The concern is addressed with the ability of lenders to diversify their risk across multiple assets in what is known as a “risk bucket.” A risk bucket is a smart contract with a specified set of trading rules defined by the community.
Met with a supportive community
In the review of the Primex Finance project, Rennick Palley, the chief investment officer of Stratos Technologies shares,
“Primex is a game changer for those looking to run a leveraged portfolio without going through a centralized exchange or a collateralized lending protocol. Primex replaces many of the capabilities of tradefi, prime brokers, but in a way that is composable with other protocols, especially DEXs and consistent with the philosophy of DeFi.”
In light of this support, Primex Finance’s growing community can expect the launch of the team’s prototype in Q1 2022, a single step in an overarching goal to eventually bridge the gap between traditional financial services and DeFi. The belief is that by making these offerings mainstream, Primex can open finance to everyone regardless of who they are or what they do.
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