Leveraged Long Trades

Leveraged longs have a payoff that returns 2-100x the nominal value of the trade at the time it was placed. Returns are denominated in USD, but settled entirely in the Market's underlying token. That token is also used as collateral.

Instead of a funding rate, these trades use strike prices. The strike price represents the value at which the trade is breakeven and it is at least the current oracle price. As a trader increases their leverage, the AMM's risk aversion will cause the strike price to rise as well. For example, if ETH is currently priced at $1,280, then a 5x leveraged long on ETH may have a strike price of $1,285, while a 100x leveraged long may have a strike price of $1,300.

Returns are simple:

• If the token's price goes up —> the trader receives more tokens back (upon closing the trade)

• If the token's price goes down —> the trader is liquidated and loses their token collateral

Longship manages risk by offering orders with varying strike prices. This means that although orders may sometimes be offered at a slight premium relative to market price, Longship's payouts are predictable; they're not subject to the balance of long/short orders in the system after the trade has been placed, as is the case with funding rates in order-books.

Who Might Be Interested in Leveraged Longs:

• Degens who likes to ape with leverage.

• Professional traders who are combining the instrument with other instruments to construct sophisticated positions.

• Options market makers who need to hedge calls/puts they have offered OTC.

Liquidations

Leveraged longs also have a liquidation price based on the strike price and the amount of leverage used. Reverting to the example above, the 100x leveraged trade might have a liquidation price of $1,287 (i.e., 1% lower than the strike price) and the 5x leveraged trade would have a liquidation price of $1,028 (20% lower than the strike price).

Borrowing the DAI model, Longship relies on decentralized “tattlers” to present the AMM with oracular evidence that a trade should be liquidated. 10% of the trade's input value is reserved for distribution to tattlers (which can be the trader themself). This “tattling fee” results in slightly higher strike prices for traders, as per the AMM's utility function.

Note that if the strike price rises above the current oracle price, the trader will be notified that unless prices change in their favor, the trade is highly likely to be liquidated in a set timeframe.

Positions can also be liquidated in the unlikely event of a market's bankruptcy. If the AMM is “long” bankrupt, long trades can be liquidated at minimum leverage. However, Longship has explicit bankruptcy rules that discourage traders from maintaining trades that could cause bankruptcy. Also, note that because each token has its own isolated market, one market's bankruptcy will not cascade to other markets.