The Method of Choosing Parameters for Margin Trading Protocols in the Constant Product Model

Abstract

We introduce a new method of choosing parameters for margin trading protocols in the Constant Product Model and apply it to our new DeFi Margin Trading protocol Primex, which can work with different DEXs and DeFi platforms. The main advantages of Primex, in comparison with existing DeFi protocols, are the following: (1) the possibility to trade with leverage, using large asset amounts and having only a small part (deposit) in one of the assets; (2) full explanation and justification of the choice of protocol parameters and relations (such as liquidation condition, maximum leverage, different fees, etc.), which allows to estimate different risks (for Lenders and the protocol) and reduce them to the required level; (3) additional decentralization and, at the same time, protection against different faults in protocol functioning, achieved by the usage of the decentralized Keeper; (4) transparent rules and conditions for all participants—Lenders, Traders, and Keepers. We give a detailed explanation for our approach to set protocol parameters and build a corresponding method to obtain their numerical values in the case of the Constant Product Model. The obtained numerical results provide additional indirect confirmation of the consistency of our method. Note that it also may be applied (after the corresponding recalculation of some coefficients) to other models, such as the Order Book Model, Constant Sum Model, or the Mixed Constant Sum/Constant Product Model (as described in the Curve whitepaper), and even other types of DeFi protocols after some modification.