Toros Finance: On-chain leverage made easy
Toros Finance has emerged at a pivotal time in the crypto-asset space as we see the narrative of decentralised derivatives being played out. As the first protocol to be integrated with the dHedge SDK (software development kit), Toros is aiming to ease the experience of derivative traders and in particular, dHedge fund managers by offering efficient one-click on-chain leverage products.
How do Toros’ Leverage Tokens Work?
Toros has not only been built through the dHedge SDK, but has also been built on top of established DeFi protocols in Aave, 1inch, and Dodo. Toros’ leverage tokens take advantage of these protocols’ libraries and resources to fulfill the expectations of what a leverage token aims to be.
Toros uses Aave’s borrowing and lending functions to manage debt leverage positions and as such allow for short-term directional upside exposure — achieved by increasing the leverage as the asset’s price increases. Inversely, Toros protects its tokens against liquidation risk by also rebalancing the underlying position on downward price movements. Essentially, when a leverage token increases/decreases in value, its leverage proportionately shifts in order to maintain the leverage range.
For example, in the diagram above we can see that if the debt ratio is below its requirement, then the rebalancing mechanism will autonomously attempt to borrow more of the asset on Aave and then deposit it as collateral in order to maintain the leverage range. This is similar to the way a user can manually maintain their leveraged positions on a permissionless protocol. However, unlike the user, Toros’ leverage tokens can take on a greater degree of risk to maximise efficiency as they have the ability to swiftly adjust their debt ratio accordingly.
Volatility Decay Risk:
Furthermore, as with any on-chain application or financial product, there are always risks associated with their use. Volatility decay poses the risk of hindering the performance of Toros’ leverage tokens due to the nature in which their leverage range is maintained. For example, (holding all else equal) on a daily timeframe if we were to hold the ETH-BULL token and the price of $ETH rose by 5%, then our position would rise by 15%. However, if we continued to hold the token into the next day and $ETH retraced to our entry price, then overall we would be down 2.25%, despite the price being the same. It is for this reason, that Toros’ leverage tokens cater for short-term exposure, rather than long-term open leverage strategies.
Impact on dHedge Funds:
With the launch of the dHedge platform on Polygon in June, we saw many managers take advantage of the low gas fees by employing more aggressive trading strategies. For example, top-ranked manager, Convex Monster created a second fund on Polygon to undergo “more active trading on a lower timeframe”. Now, with the platform being launched on Optimism, the need for easy and efficient leverage becomes evermore necessary. This is exemplified by how 96.67% of the public posts in the last week have been from L2-based managers. Subsequently, with the ratio of total funds likely to be skewed more positively towards L2 chains, those aggressive trading strategies will become more common, and as such Toros’ leverage tokens will enable managers to gain more efficient short-term exposure.
What Does the Future Entail?
The team plans to release further on-chain derivative products as we head into the new year. These products include impermanent loss protection, basis trading, and various structured products. Yield farming without impermanent loss will be made possible through a range of strategies implementing delta-neutral positions. Moreover, Toros will grant traders the ability to easily engage in basis trading without having to employ the underlying arbitrage strategies themselves. Furthermore, Toros will allow traders to capitalise on the various instruments on offer by providing structured products which algorithmically manage these instruments’ complexities.
In essence, Toros Finance is an exciting product within the growing Synthetix ecosystem. Its ease of use, highly-experienced team, and innovative products put it in a good position to disrupt the derivatives market and compete against centralised exchanges.