Read Particle: The leverage trading platform that allowed Arthur Hayes to take action again after a year.

Introducing the AMM mechanism and intending to build a leveraged DEX for NFTFi.

Written by: Joyce

In the derivatives market, centralized exchanges occupy the vast majority of the market, and the penetration rate of derivatives DEX is still relatively low, which also means that there is still a lot of room for development. Binance currently offers 301 derivatives trading pairs, while dYdX and GMX only offer 37 and 7 trading pairs respectively. Therefore, for investment institutions, expanding the list of derivatives trading pairs is a very attractive selling point for derivatives trading platforms. After all, the development of the crypto market is inseparable from the pursuit of improved capital efficiency.

Recently, BitMEX founder Arthur Hayes invested in a new project after a year, Particle, a leveraged trading platform based on the AMM mechanism. On January 12, Particle announced the completion of a seed round of financing, led by Polychain Capital, with participation from Nascent, Inflection, Neon DAO, Naveen Jain, Arthur Hayes and others.

Projects invested by Arthur Hayes

Why is Particle so favored by Arthur Hayes? According to reports, Particle has introduced the centralized AMM mechanism of Uniswap V3. Liquidity is borrowed from a predefined LP range, so that the protocol can have liquidity without borrowing and can create a permissionless capital pool for any token.

Particle’s “LAMM” mechanism

While most leveraged trading protocols can only trade a small number of mainstream tokens, Particle envisions a truly permissionless leveraged trading protocol. Just as Uniswap allows any token to be traded, Particle will allow any token to be traded with leverage.

Particle created a protocol called “LAMM” that enables traders to borrow directly from the AMM liquidity pool where liquidity is concentrated (from Uniswap v3). No separate lending agreement is required to build leveraged positions on tokens.

LAMM sets price boundaries for LP tokens, concentrates liquidity within that range, and ensures that tokens are always convertible within those boundaries. However, if the price of the LP token falls below a predefined lower limit, Particle automatically converts all assets into one of the two tokens and liquidates them based on a preset formula. This process effectively allows borrowing LP tokens to build leveraged positions.

In terms of liquidation mechanism, LAMM can ensure that the assets borrowed by LP will always exist under any price conditions and will not lose liquidity.

The clearing mechanism of traditional derivatives protocols relies on accurate price oracles and external liquidity from the market. Under this mechanism, illiquid long-tail assets face great risks. Particle approaches this problem in a different way, for any centralized liquidity position on a token pair, its price boundary mathematically defines the number of tokens to be converted at all price points. When borrowing from a centralized liquidity position, the protocol calculates the exact amount required to top up so that the contract locks in enough tokens in case the price moves adversely towards the price boundary).

Additionally, by recording swap fees accumulated when borrowing and returning, the protocol ensures that borrowers pay no less than the swap fees earned from the original pool by borrowing liquidity. In this way, Particle is able to incur strictly higher interest charges for LPs and does not incur higher impermanent losses than its original swap liquidity provisions.

example:

Consider the ETH/USDC LP position, focusing on the [1800, 2200] USDC/ETH price range.

Current ETH price is 2000 USDC; position long ETH using USDC According to Uniswap’s math, for an LP position at the current price, borrowing 10¹⁴ units of liquidity would result in withdrawing 0.104 ETH and 229.495 USDC. Assuming no price impact, converting 229.495 USDC to ETH at the current exchange rate (2000 USDC/ETH) would yield 0.115 ETH.

If the ETH price falls below the lower limit (1800 USDC/ETH), the liquidity for 10¹⁴ units will be concentrated at 0.225 ETH (and no USDC). The trader needs to invest 0.225 − 0.104 (borrowed ETH) − 0.115 (exchanged ETH) = 0.006 ETH. This ensures that LP is guaranteed to receive back 10¹⁴ units of liquidity regardless of the return price of ETH. This is because, at the lower limit, regardless of the combination of ETH and USDC, it is guaranteed that the maximum amount of ETH can cover the borrowed liquidity.

Leverage Analysis: A trader can leverage 0.219 ETH worth of liquidity using only 0.006 ETH. This is equivalent to a leverage ratio of 0.219/0.006 = 36.5 times.

Through this design, the Particle Protocol eliminates the need for price oracles, thereby eliminating many potential attack scenarios and the possibility of market manipulation. Additionally, with most traditional perpetual contracts platforms, the counterparty of a trader (e.g. a long position) is a trader on the other side (e.g. a short position). These platforms require sophisticated mechanisms to manage counterparty risk by balancing the incentives of both parties, such as dynamic funding rates.

On Particle, leverage comes from the relative increase or decrease in value of the underlying assets. This means that profit and loss (PnL) is determined by the performance of the asset itself, rather than by counterparty losses. The scalability of the Particle protocol means that the protocol can efficiently support a variety of trading positions as long as there is sufficient liquidity available.

Incentive mechanism for LP and traders

The Particle protocol offers an advanced model with a fixed borrowing period of 7 days. When opening a position, traders select a portion of the liquidity as a premium. The position accrues interest at a rate equivalent to what the borrowed liquidity would have earned as swap fees in its original pool. On a technical level, the Particle contract records a fee tracker on the liquidity boundary when a position is opened. The current fee tracker allows swap fees to be calculated proportionally for borrowed liquidity.

Unborrowed liquidity can be withdrawn at any time when the LP decides to withdraw liquidity and stop earning interest. Particle provides the function of preempting liquidity after 7 days of regular borrowing. Whenever the interest depletes the premium or the borrowing period expires, anyone can close the position as an external liquidator and earn part of the premium as a liquidation reward. Share amounts and 7-day parameters can be adjusted later.

From the perspective of liquidity providers, there are two methods of increasing yields in Particle.

Trading Fees: For each leveraged position opened, traders are required to pay a fee of 0.05% of the leverage amount. This transaction fee is in addition to the standard interest earned on the borrowed liquidity through swap activities. This mechanism is designed to ensure that LPs earn significantly higher fees by lending within the Particle ecosystem. The Particle treasury shares transaction fees with LPs that provide liquidity, and the treasury will be used to further reward and increase the liquidity of different token pairs.

Borrowing Liquidity Out of Range: Typically, when a concentrated liquidity position falls outside of its price range, it will stop earning the usual swap fees. However, in Particle, traders can still borrow this out-of-range liquidity for leveraged trading and pay position fees directly to these LPs. This model enables LPs to continue to earn income from liquidity even when liquidity extends beyond active trading.

From a trader’s perspective, this arrangement represents the advantage of interest-free leverage, provided that prices do not revert to concentrated liquidity ranges.

Based on these designs, the Particle protocol coordinates the interests of multiple parties. For token projects, it can increase attention and faster price discovery. In addition, the form of leveraged trading involves actual asset swaps in the spot market, which directly promotes the increase in the transaction volume of token projects. Liquidity providers will receive proceeds from borrowed liquidity and swap fees. In addition, the LAMM architecture of the Particle protocol is built on the liquidity-centralized AMM. Since every transaction in the protocol involves trading on the spot market, the underlying AMM will also receive fees.

Join the NFT derivatives track?

Coincidentally, today (January 19) is the last day of Particle’s Alpha test, and nftperp, the decentralized perpetual contract protocol for NFT, also announced its V2 interface today. BlockBeats once introduced nftperp, which can increase leverage to short NFT. Six months ago, its V1 was shut down because the vAMM model could not be expanded.

According to the introduction of the Particle team in Discord, before launching Particle, the team had launched a product related to NFT liquidity solutions. However, Particle did not provide specific information about the team. It only revealed that team members have many years of work experience in companies such as Google and Facebook. The founder dropped out of MIT and devoted himself to Web3 entrepreneurship.

Judging from the announcement, in a tweet in September 2023, Particle introduced its positioning as “enabling traders to short-sell any collection of NFTs and profit from price drops.” In October, Particle announced its Partnership with NFT fragmentation protocol Flooring Protocol. In Particle’s just-concluded Alpha test, the trading pairs provided also include NFT fragmented token trading pairs such as FLC/ETH and μBAYC/ETH.

Although the current introduction of Particle’s Twitter account is “a permissionless leverage trading protocol suitable for any digital asset” and announced on January 17 that it will participate in the Perp Dex group of Blast’s Big Bang competition, based on these publicity signals, perhaps The asset trading pairs after Particle will be more biased towards the NFT market.

However, Particle has not yet given more information on how to anchor the NFT floor price mechanism and whether “creating any trading pair” is intended to solve the problem of insufficient liquidity of long-tail NFTs.

Regardless of whether it focuses on NFT or not, derivatives have always been a potential market favored by capital. Although few people can escape from contract trading, since Arthur Hayes’ BitMEX pioneered the “perpetual contract” trading derivative in 2016, various derivatives can amplify volatility, high returns and high risks. It has always attracted traders who pursue financial efficiency.

At present, the on-chain derivatives trading market has an obvious head effect. There have been classifications of different mechanisms such as order books, vAMM and P2P. Several perpetual contract protocols combined with the AMM mechanism have emerged, such as the virtual currency-based virtual currency that was born in 2021. AMM’s Perpetual Protocol once occupied the No. 1 position in trading volume on the Perp track. In 2023, InfinityPools became a potential protocol that attracted much attention at the time with the highlight of providing unlimited leverage trading on any asset. In this regard, Particle is not the first to come, but there has been no very eye-catching product in the past year, and Particle still has room for development.

Particle has not been officially launched yet, and the team has not disclosed the currency issuance situation. Its future development is still unknown. BlockBeats reminds that although leveraged trading has the potential for huge returns, investors also face greater risks of losses. Therefore, when using leveraged strategies, investors need to have more sophisticated risk management capabilities, be cautious, fully understand market risks, and formulate Scientific risk management strategies.

Reference reading:

《AMM LP-Enabled Perps, Options, and Volatility Trading Products》