Protocol Rules

# Leverage

S&F introduce a new concept of leverage called Embedded Leverage.

Traditional leverage on other platform consist of borrowing a certain amount of collateral to increase the exposure to an asset.

A 2 times leverage in that case would mean that you borrow 1 unit of collateral to buy 2 units of the asset. Such a leverage requires maintaining a sophisticated engine, that will liquidate traders as soon as the loss amount of the position get too close to the collateral threshold.

Because S&F cannot rely on high frequency Oracles or cascading liquidations - that cannot scale in a truly decentralised environment - we came up with a different solution to the leverage problem.

# Embedded Leverage

Since S&F has no liquidation engine, and will never have one. We came up with a different kind of leverage that does not involve direct borrowing.

We call it Embedded Leverage because the leverage is reflected in the asset price rather than in the trader debt.

Imagine that instead of being exposed to the price of an asset, you are exposed to the price squared - as the derivative's value is based on the square of the asset's price, small movements in the underlying price can lead to larger movements in the derivative's value, effectively providing leverage.

One has to be careful with embedded leverage, a squared leverage will square your gains - or your loss, as opposed to a linear leverage that will double your gains - or your loss.

Example:

ETC price is 10$ at time t, at time t+1 the price is now 30$.

In a traditional market, with a 2 times leverage your gains would be:

(30 * 2) - (10 * 2) = 40$.

With embedded leverage, The entry price would have been 10^2 = 100$. 10$ would get you 0.1 units of the asset. At t+1, the price is 30^2 = 900$. Your gains would be:

(0.1 * 900) - 10$ = 80$.

Squared leverage in that case is equivalent to a 4 times leverage. With no liquidation risks.

For each asset price available, S&F allow the creation of 3 synths, defined by their own leverage:

• 1x leverage, representing the asset price 1:1
• Squared leverage, representing the asset price squared
• Cubed leverage, representing the asset price cubed