TL;DR

Introduction

Imagine that you hold $1000 worth of USDC in your portfolio.

You neither want all of those stablecoins to sit idly, nor wish to take too many risks in investing, and most importantly, you don't want to spend too much time understanding all those obscure concepts and intricate mechanisms in derivatives - this would definitely blow everyone's brains out.

Well, what if I told you that there’s a way to earn up to 25% APY by simply depositing your stablecoins to a DeFi platform?

Sounds too good to be true? This can be done with the magic of ETH perpetual contract swap and USDC farm on Arbitrum. One of the emerging platforms is Rage Trade.

In this article, we are going to walk through what is Rage Trade, why it’s special , how it works and its potential risks.

What is Rage Trade?

So, let’s take it from the top – what is Rage Trade?

Essentially, Rage Trade is a decentralized exchange protocol for trading ETH perpetual contracts founded in 2021. To be more specific, it provides a platform with up to 5x leverage and has a unique feature that allows users to recycle their liquidity from other protocols. The Delta Neutral GLP vault, which is an investment product invested in GMX, is also available for users to choose between a Risk-On and Risk-Off strategy.

The protocol is deployed on both the Ethereum and Arbitrum mainnets, with the perpetual swapping product on Ethereum and the USDC yield-farming product on Arbitrum.

Rage Trade's TVL (Total Value Locked) has rapidly expanded to over 15 million, accounting for 3.6% of the total GLP Pool size.

A lot of difficult terms, huh? We’ll break them down right now.

(1)    ETH Perpetual Contract

ETH perpetual contract allows traders to place a buy or sell order at a fixed price indefinitely i.e., with no expiry date. This differs from spot trading, which refers to the buying and selling of an underlying asset at the current market price for immediate delivery. It operates similarly to a traditional contract, but with the difference that there is no fixed expiration date.

Perpetual contract has become increasingly popular among crypto traders over recent years, with data showing daily trading volumes of over $220 billion.

(2)    USDC Yield-farming

USDC yield-farming refers to the practice of providing liquidity to a DeFi protocol in exchange for rewards in the form of interest or tokens. The rewards are typically paid out in the form of the protocol's native token or stablecoins, such as USDC. Rage Trade has launched a USDC yield-farming product on the Arbitrum mainnet, which allows users to farm USDC by providing liquidity to the platform.

(3)    Liquidity Recycle

Recycled liquidity refers to the process of taking liquidity that has been provided to one DeFi protocol and using it to provide liquidity on another protocol. This can be done through the use of automated market maker (AMM) protocols. It allows LPs to take advantage of higher yield opportunities available on different protocols and to increase the overall yield earned by liquidity providers (LPs).

Let’s make this process clear with an example. If an LP has provided liquidity in a pool on Uniswap V2 and is earning a yield of 3% per annum but discovers a higher-yielding pool on SushiSwap that pays a yield of 4% per annum, they can "recycle" their liquidity by removing it from the Uniswap V2 pool and using it to provide liquidity on the SushiSwap pool. By doing this, the LP can earn a higher yield of 4% on their liquidity, instead of the 3% on Uniswap V2.

Now we have a deeper understanding of these mentioned concepts, as for the core mechanisms underlying the design of Rage Trade, such as the Omnichain Liquidity, Delta Neutral GLP vault and 80-20 Vault, we will have a detailed explanation later in this article.

Why is Rage Trade created?

Rage Trade is using a distinct design from current perpetual protocol competitors.

Current popular perpetual protocols include:

(1)    dYdX

dYdX is a decentralized exchange platform built on Ethereum that was founded in 2017. It offers a range of trading products, including perpetual swaps, options, and margin trading.

Unlike Rage Trade, dYdX relies on a more traditional order book and market makers. It uses an order book system to match buyers and sellers, similar to centralized exchanges. It also utilizes market makers to provide liquidity to its order book.

(2)    GMX

GMX is using a shared liquidity pool. By pooling liquidity across multiple exchanges, it creates a larger pool of buyers and sellers, which results in a more liquid market and less slippage.

However, shared liquidity pools can also pose certain risks. For example, if one of the exchanges in the pool experiences a sudden drop in liquidity, it could lead to large price swings and increased volatility. Additionally, if one of the exchanges in the pool is hacked or experiences technical difficulties, it could have a ripple effect on the entire pool.

(3)    Perpetual Protocol

Perpetual Protocol is using the same design called virtual automated market makers (vAMMs) as Rage Trade. vAMM uses a mathematical formula to calculate the price of assets and execute trades. This makes the exchange more efficient and reduces slippage, as there is always a pool of liquidity available.

However, the downside to this approach is that vAMM is only as strong as its weakest link. If one of the protocols that provides liquidity to the vAMM is hacked or fails, it can negatively impact the entire vAMM and lead to losses for users.

Despite the merits and success of the above designs, one issue remains unsolved, which is fragmented liquidity. We can see the splintering of liquidity across multiple protocols and platforms, thus, each of which needs to bootstrap its own liquidity to facilitate trading.

That’s why Rage Trade is here.

A Detailed Look at Rage Trade’s Solutions

Decentralized perps suffer from low liquidity, fragmentation is one of the reasons. What Rage Trade is doing is they gather all the splintering liquidity fragments together into a vault. Brilliant idea, right? Let’s have a deeper look into how they achieved this.   

(1)    Omnichain Recycled Liquidity

Omnichain vaults allow users to deposit yield-generating assets from Layer Zero compatible chains into Rage. The following chart demonstrates how Rage is re-using ETH+USD liquidity across chains and protocols to LP into our ETH perp:

An example of this concept in action would be this –

If a user has deposited liquidity into a DEX like Uniswap or a money market like Aave. Instead of leaving their funds idle, the user can recycle their LP shares into Rage's 80-20 Vault LP, which pools together liquidity from multiple sources to provide liquidity for an ETH perpetual contract. This allows the user to earn extra yield on their LP shares and increases the liquidity in the Perpetual Protocol.

By recycling liquidity from various sources, Rage can unify the liquidity into a single, omnichain ETH perpetual contract, making it more liquid and accessible to traders.

(2)    80-20 Vaults

Now let’s see what will happen when the users’ LP shared poured into 80-20 Vaults.

In an 80-20 vault, 80% of the Total Value Locked (TVL) earns yield from an external protocol, such as a yield farming platform or a borrowing/lending platform, while 20% of the TVL provides concentrated liquidity on Rage.

Let's say John has $10,000 to invest. Here's how the 80-20 vault works for John:

The vault allocates 80% of John's deposit, or $8,000, into yield generating protocols like Curve, Uniswap, Sushi, and Balancer. These protocols earn John 4% and 8% APY on his invested ETH and USDC, respectively.

The remaining 20% of John's deposit, or $2,000, is used to provide liquidity on Rage Trade. This generates additional yield from trading fees and $RAGE token rewards.

Overall, John's investment in the 80-20 vault earns him yield from the yield generating service, Rage trading fees, and $RAGE tokens.

(3)    The Delta Neutral Vault

While the goal of 80-20 Vault is to earn additional yield on LP positions, the Delta Neutral Vault, another mechanism on Rage Trade, is more focused on minimizing the risks of price volatility.

The exposure of the underlying assets can be hedged by opening a short, so that any impermanent loss or gain would match profits or losses on the short, making the net position delta neutral.

Delta Neutral Vault achieved this with the help of two separate risk vaults — Risk On Vault and Risk Off Vault.

3.1 Risk On Vault

Users can deposit sGLP or USDC in the Risk-On Vault to provide delta neutral GMX liquidity. The Risk-On Vault indicates a stable yield of 15-25% APY (Backtest from Jan - Sep 2022).

Let's consider an example to explain how the Risk-On Vault on Rage Trade hedges against the Global Liquidity Pool's (GLP) exposure to ETH and BTC.

Suppose the current target weight of ETH in the GLP is 30% and that of BTC is 70%. This means that 30% of the GLP is invested in ETH and 70% is invested in BTC. Now, suppose the price of ETH drops significantly, causing the value of the GLP to decrease. This is where the Risk-On Vault steps in to hedge against the GLP's exposure to ETH and BTC.

Here's what the Risk-On Vault would do in this scenario:

1.     Takes an ETH and BTC flash loan on Balancer: The Risk-On Vault would take a flash loan of ETH and BTC from Balancer, which is a decentralized exchange.

2.     Shorts ETH and BTC on UNI v3: The Risk-On Vault would then short sell the ETH and BTC on UNI v3, which is another decentralized exchange. By short selling, the vault would bet that the price of ETH and BTC would decrease, allowing it to make a profit.

3.     Deposits USDC on Aave: The Risk-On Vault would then deposit the USDC obtained from the short sale on Aave, which is a decentralized lending platform.

4.     Adds additional USDC from Risk-Off Vault to Aave: The Risk-On Vault would then add additional USDC from the Risk-Off Vault to Aave, maintaining a health factor of 1.5. The health factor is a metric used to ensure that the vault has enough collateral to repay its debts.

5.     Creates a short position on Aave by borrowing ETH and BTC against the USDC collateral: The Risk-On Vault would then borrow ETH and BTC from Aave, using the USDC collateral deposited earlier. This creates a short position, which means that the vault is now betting against ETH and BTC.

6.     Repays borrowed tokens to Balancer: Finally, the Risk-On Vault would repay the borrowed ETH and BTC to Balancer, completing the hedging process.

By taking these steps, the Risk-On Vault would protect the GLP from the potential losses due to a drop in the price of ETH and BTC. Additionally, the vault would also make a profit if the price of ETH and BTC decreases, allowing it to improve the overall liquidity of the GLP.

3.2 Risk-Off Vault

Users can also deposit USDC in the Risk-Off Vault to earn a stable lending yield. The Risk-Off Vault yield is at 6-8% APY compared to the ~0.5% supply APY on Aave (Backtest from Jan - Sep 2022).

The Risk-Off Vault mechasim is a lot simpler, we can consider it as a low risk USDC lending vault.  It lends USDC to the Risk-On Vault which uses the USDC to short the ETH & BTC exposure in GLP.

Let's say you have 100 USDC in the Risk-Off Vault.

This 100 USDC is lent to the Risk-On Vault and used to short ETH and BTC exposure in GLP. The Risk-Off Vault earns interest on the entire 100 USDC position in Aave, which means the yield is based on a position of $200-$300.

In this scenario, let's assume the interest rate on Aave is 5% per annum. Over a year, the Risk-Off Vault will earn $5 in interest on the 100 USDC (5% of 100 USDC = $5).

Additionally, let's say the Utilization Ratio of the vault is 50%. This means the Risk-Off Vault will earn a fraction of ETH yield from GLP, which is 50% of the total ETH yield generated by GLP.

So, in this scenario, not only does the Risk-Off Vault earn interest on the USDC, but it also earns a portion of the ETH yield from GLP. This process helps the Risk-Off Vault earn leveraged yield on Aave, further boosting its overall returns.

What are the risks?

(1) Arbitrum Downtime: If the Arbitrum network is down for an extended period of time, the vault payoff may deviate from the expected UNI v2 payoff.

(2) Yield Generating Asset Risk: Yield generating assets such as Curve's Tri-Crypto may experience their own impermanent loss which could cause the payoff to deviate from UNI v2.

(3) Counterparty Risk: RageTrade is an decentralized platform, but you may still be exposed to the risk of counterparties not fulfilling their obligations.

(4) Technical Risks: RageTrade uses blockchain technology, and there may be technical issues or vulnerabilities that could lead to the loss of funds.

(5) Regulatory Risk: The regulatory landscape for cryptocurrencies is constantly evolving, and there may be future regulations that could negatively impact the use or trade of cryptocurrencies.

Conclusion

In summary, the RageTrade platform combines the benefits of the 80-20 Vault and Omnichain Liquidity Recycle mechanism to improve liquidity, while also utilizing the Delta Neutral Vault to minimize risks.

This combination makes RageTrade a unique and innovative platform that can help users navigate the complex world of DeFi with confidence.

And just like any other trading platform, RageTrade also carries certain risks that traders should be aware of. It is important to understand these risks and to make informed decisions when trading on RageTrade or any other platform. It is also important to carefully consider your own investment goals, risk tolerance, and experience before investing in any asset.

I do hope that you’ve learned a lot about what Rage Trade is and, more importantly, how it works. What do you think - is Rage Trade an interesting project? Or is it overhyped? Leave your thoughts in comments!