Leveraged Minting on Derived Platform

Introduction to Leveraged Minting

In this article, let’s take a closer look at one of the main advantages Derived Finance protocol offers to users. What is Leveraged Minting and how it changes the DeFi world?

Derived finance aims to propel the usage of leveraged synthetic assets on Polkadot. Synthetic assets have become very popular in recent times with the introduction of protocols like Synthetix, UMA, and Mirror finance. In the age of blockchain, transparency, censorship resistance, and globally distributed characteristics make tokenization of assets a lucrative investment opportunity for an average person to invest in stocks, commodities, and any other assets in the world.

While the protocols mentioned above have their own architecture and way of handling Derived assets, Derived protocol aims to improve upon those above like providing a gateway to a global decentralized marketplace with no restrictions by any centralized authorities. Added to this, you will also have several features of Defi with a click of a button away like staking and earning returns. This week we will explain one of the main tech features of Derived Finance: LEVERAGED STAKING AND MINTING

Why Stake and what to mint?

Staking is the most crucial part of our platform and the entire architecture is built around it. To participate in the platform trading, every user needs a special stablecoin that we are calling USDx. The only way of creating this USDx is by staking the native token of Derived, i.e. DVD token. Thus stakers of DVD tokens help in maintaining liquidity of the Derived Platform and thus receive staking rewards.

The USDx is a stablecoin backed by DVD just like DAI is backed by ETH. You can mint it by staking or you can just swap it on any DEX where it is available. Users can then use the USDx to trade on the platform or on any other platform. Also, users can use the USDx to buy more DVDs for staking. To maintain the peg of the USDx the user needs to maintain DVD as collateral in the contract and the ratio is known as the collateralization ratio (CR). Of course, there is always an option to buy USDx directly from DEXes if the user does not want to buy or stake tokens. However, such users do not get any staking rewards.

Problem with current staking mechanisms

Current platforms with similar properties either use a very high Collateralization Ratio (CR) of up to 500%. What that means is that for every deposit of $500, you get $100 worth of synthetic USD to trade on the platform. This creates a problem for the following reasons:

  • greatly limits the liquidity of the platform and also locks in more funds for the user
  • makes trading on the platform unviable for a small trader
  • locks in high collateral that could have been better used and ties large amounts of funds in the protocol (which is a sign of inefficient protocol despite the craze around TVL)
  • the users can not change this ratio for themselves. It is fixed by the protocol and not flexible. “One size fits all approach”

How Derived Leveraged minting works

The Derived platform allows users the flexibility to choose the leverage while staking their DVD tokens on the platform. They can use up to 3x leverage based on their risk appetite. The leveraged minting function allows the user to unlock more of their staked capital on the platform.

Let’s consider the following example to illustrate the working of Leveraged minting. The CR and Liquidation Ratio (LR) vary on the basis of leverage selected. Normally for leverage, users pay interest for the borrowed amount. But, in this case, you simply borrow from yourself, and hence there is no interest to payout. All the CR, LR, Forced LR varies based on the leverage that the user selects.

(Example for DVD minting and Leverage ratios. The price of DVD is assumed to be $1.00 )

There are two ratios; liquidation ratios (i.e. Liquidation Ratio or LR) and Forced Liquidation Ratio (FLR). When the CR drops below LR, the user gets a grace period to fix his C.R. before the position is liquidated. However, if the CR drops below FLR before the user is able to fix the CR or before the grace period that case his position is liquidated immediately to maintain the peg on USDx. This way the USDx becomes a stable coin backed by DVD (which always sticks to its dollar peg) and should not be confused with algorithmic stable coins.

High-level Illustration of Leveraged Minting / Liquidation Engine


Thus, it is clear from the discussion that Leverage Minting offers a solution to the problems of the current platforms. It helps unlock the collateral potential by providing flexibility to the user to decide its leverage while staking on the platform. It also improves the liquidity on the platform. We believe in decentralization, and one of the aims of decentralization is the inclusivity of all people and providing them with the most flexibility. It enables users with limited capital to also participate in the protocol. Hence, with leveraged Minting at its core, we are happy to say that the Derived platform will provide more power to its users.

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