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F(x) Protocol Research Article 1: The Optimal Choice for Long-Term LeverageProduct Highlights
Minimizes funding rates through mechanisms like the Fx invariant formula, collateral yield, flash loans, and stability pools.
Utilizes Rebalance + Fx invariant formula to dynamically adjust at typical contract liquidation points, resulting in lower liquidation risk compared to other perpetual trading platforms.
Initially, I perceived the F(x) Protocol as a decentralized stablecoin product. However, with the launch of F(x) 2.0 and the introduction of shorting mechanisms, its core functionality has shifted toward a perpetual decentralized exchange (Perp DEX). Unlike other Perp DEXs, F(x) demonstrates significant innovation in its mechanisms, appealing to many “long-term leverage players.”Core Trading MechanismTo avoid confusion with formulas, let’s start with examples of longing and shorting:Example 1: Long PositionUser A deposits $100 of stETH into the F(x) Protocol and opens a 10x leverage long position:
The protocol borrows $900 via a flash loan and mints $900 fxUSD.
An xPOSITION is created with $100 collateral and a total exposure of $1,000 ($100 stETH + $900 fxUSD).
If ETH price rises 10%, the position’s value increases to $1,100, yielding a $100 profit (10x the $10 collateral gain).
If ETH price falls, rebalancing burns fxUSD and sells stETH to maintain safe leverage.
Example 2: Short PositionUser B deposits $1,000 fxUSD to create a 3x leverage sPOSITION to short ETH:
The protocol borrows $3,000 worth of stETH, sells it for fxUSD, and creates an sPOSITION.
If ETH price drops 10% (stETH value falls to $2,700), User B repurchases stETH for $2,700, returns it to the protocol, and earns a $300 profit (after fees).
If ETH price rises 10% (stETH value rises to $3,300), the position loses $300, covered by the $1,000 fxUSD collateral.
Key Questions AnsweredWhat are xPOSITION and sPOSITION?xPOSITION (long) and sPOSITION (short) are NFTs representing long and short positions on assets. Currently, long positions offer up to 7x leverage for ETH and 10x for BTC. Collateral (ETH or BTC) can generate staking yield (e.g., via stETH).How do these mechanisms work? Why can A mint $900 fxUSD with 10x leverage?This involves the core mechanism: the F(x) invariant formula C = S + L, where:
F(x) Protocol Research Article 1: The Optimal Choice for Long-Term LeverageProduct Highlights
Minimizes funding rates through mechanisms like the Fx invariant formula, collateral yield, flash loans, and stability pools.
Utilizes Rebalance + Fx invariant formula to dynamically adjust at typical contract liquidation points, resulting in lower liquidation risk compared to other perpetual trading platforms.
Initially, I perceived the F(x) Protocol as a decentralized stablecoin product. However, with the launch of F(x) 2.0 and the introduction of shorting mechanisms, its core functionality has shifted toward a perpetual decentralized exchange (Perp DEX). Unlike other Perp DEXs, F(x) demonstrates significant innovation in its mechanisms, appealing to many “long-term leverage players.”Core Trading MechanismTo avoid confusion with formulas, let’s start with examples of longing and shorting:Example 1: Long PositionUser A deposits $100 of stETH into the F(x) Protocol and opens a 10x leverage long position:
The protocol borrows $900 via a flash loan and mints $900 fxUSD.
An xPOSITION is created with $100 collateral and a total exposure of $1,000 ($100 stETH + $900 fxUSD).
If ETH price rises 10%, the position’s value increases to $1,100, yielding a $100 profit (10x the $10 collateral gain).
If ETH price falls, rebalancing burns fxUSD and sells stETH to maintain safe leverage.
Example 2: Short PositionUser B deposits $1,000 fxUSD to create a 3x leverage sPOSITION to short ETH:
The protocol borrows $3,000 worth of stETH, sells it for fxUSD, and creates an sPOSITION.
If ETH price drops 10% (stETH value falls to $2,700), User B repurchases stETH for $2,700, returns it to the protocol, and earns a $300 profit (after fees).
If ETH price rises 10% (stETH value rises to $3,300), the position loses $300, covered by the $1,000 fxUSD collateral.
Key Questions AnsweredWhat are xPOSITION and sPOSITION?xPOSITION (long) and sPOSITION (short) are NFTs representing long and short positions on assets. Currently, long positions offer up to 7x leverage for ETH and 10x for BTC. Collateral (ETH or BTC) can generate staking yield (e.g., via stETH).How do these mechanisms work? Why can A mint $900 fxUSD with 10x leverage?This involves the core mechanism: the F(x) invariant formula C = S + L, where:
C = Collateral (or collateral value with x leverage).
S = Minted fxUSD.
L = xPOSITION value (equal to collateral value).
For A’s $100 ETH with 10x leverage:10 (leverage) × $100 ETH (collateral value) = $900 fxUSD (minted) + $100 xPOSITION (collateral value).How does the mechanism operate if prices change?If ETH price drops 5%, the long position’s total value falls to $950. Per the invariant formula, with fxUSD unchanged, xPOSITION value becomes $50, resulting in an LTV of 94.7% ($900 debt / $950 total value), higher than the initial 90% LTV. To maintain 90% LTV, the burn formula is:fxUSD to burn = (Debt - Initial position value × Target LTV) / (1 - Target LTV)This requires burning $450 fxUSD, and $50 of collateral is sold to the stability pool to avoid bad debt. Post-burn, the invariant formula becomes:x leverage × $40 (original $90 - $50) = $450 + $50, implying ~12x leverage (in practice, lower). fxUSD acts as a balancer, automatically adjusting debt ratios to help users maintain positions in markets where liquidation would typically occur. For short positions (sPOSITION), if prices rise beyond a threshold, the protocol sells part of the collateral to repay debt, preventing liquidation.Note: The protocol still has a liquidation line. If prices rise/fall beyond this threshold, liquidation occurs, so users must maintain risk awareness.Low Funding Rate MechanismAfter understanding the core trading mechanism, the standout feature of F(x) is clear: a leverage product with lower liquidation risk. Another major highlight is its low funding rates.What are funding rates in DeFi?In traditional DeFi perpetual futures or leverage platforms (e.g., Binance, dYdX), funding rates are periodic fees paid between long and short position holders to balance the market. They compensate for imbalances, ensuring perpetual contract prices align with spot markets. High funding rates can erode profits, especially in volatile markets.How does F(x) Protocol reduce funding rates?
No traditional funding rate mechanism: Unlike perpetual futures platforms, F(x) doesn’t rely on funding rates to balance long/short positions. The invariant formula (C = S + L) dynamically manages leverage and collateral, avoiding periodic payments between holders. xPOSITION and sPOSITION, as NFTs, are backed by collateral (stETH/WBTC for xPOSITION, fxUSD for sPOSITION), eliminating the need for counterparty funding fees.
Flash loans for leverage: When creating xPOSITION or sPOSITION, the protocol uses flash loans to borrow assets (e.g., USDC or stETH) for leverage, without ongoing borrowing costs. For example, $200 stETH with 7x leverage creates $1,200 fxUSD via a flash loan, with only a one-time opening fee (e.g., 0.5%), no ongoing funding rates.
Collateral yield offsets costs: xPOSITION collateral (e.g., stETH) generates staking yield, distributed to the stability pool or used to offset protocol fees. This reduces the effective cost of maintaining leveraged positions, offsetting funding rates. For sPOSITION, fxUSD collateral is stable, requiring no additional funding payments, with short positions managed via stability pool liquidity.
Stability pool and peg maintenance: The stability pool (holding fxUSD and USDC) absorbs market imbalances through arbitrage (buying fxUSD when undervalued, selling when overvalued), maintaining fxUSD’s 1:1 USD peg without funding rates. In rare cases, if fxUSD stays below peg for long, xPOSITION holders may pay a temporary funding fee to incentivize stability pool deposits, but this is minimal and resolved quickly via arbitrage or redemption.
Auto-rebalancing reduces liquidation costs: The rebalancing mechanism adjusts leverage when LTV exceeds safe thresholds (e.g., 88% for xPOSITION), burning fxUSD and selling collateral to maintain stability, avoiding forced liquidations and high funding rates common on other platforms. By keeping positions at safe leverage levels, the protocol reduces the need for costly manual interventions or funding rate adjustments.
Zero funding rates under normal conditions: In normal market conditions, xPOSITION and sPOSITION incur no funding rates, as the protocol relies on collateral-backed leverage and yield generation, not periodic payments. This is a key distinction from traditional perpetual futures, which may charge funding rates every few hours.
I’ll cover other protocol features in a future article. Thanks for reading!
C = Collateral (or collateral value with x leverage).
S = Minted fxUSD.
L = xPOSITION value (equal to collateral value).
For A’s $100 ETH with 10x leverage:10 (leverage) × $100 ETH (collateral value) = $900 fxUSD (minted) + $100 xPOSITION (collateral value).How does the mechanism operate if prices change?If ETH price drops 5%, the long position’s total value falls to $950. Per the invariant formula, with fxUSD unchanged, xPOSITION value becomes $50, resulting in an LTV of 94.7% ($900 debt / $950 total value), higher than the initial 90% LTV. To maintain 90% LTV, the burn formula is:fxUSD to burn = (Debt - Initial position value × Target LTV) / (1 - Target LTV)This requires burning $450 fxUSD, and $50 of collateral is sold to the stability pool to avoid bad debt. Post-burn, the invariant formula becomes:x leverage × $40 (original $90 - $50) = $450 + $50, implying ~12x leverage (in practice, lower). fxUSD acts as a balancer, automatically adjusting debt ratios to help users maintain positions in markets where liquidation would typically occur. For short positions (sPOSITION), if prices rise beyond a threshold, the protocol sells part of the collateral to repay debt, preventing liquidation.Note: The protocol still has a liquidation line. If prices rise/fall beyond this threshold, liquidation occurs, so users must maintain risk awareness.Low Funding Rate MechanismAfter understanding the core trading mechanism, the standout feature of F(x) is clear: a leverage product with lower liquidation risk. Another major highlight is its low funding rates.What are funding rates in DeFi?In traditional DeFi perpetual futures or leverage platforms (e.g., Binance, dYdX), funding rates are periodic fees paid between long and short position holders to balance the market. They compensate for imbalances, ensuring perpetual contract prices align with spot markets. High funding rates can erode profits, especially in volatile markets.How does F(x) Protocol reduce funding rates?
No traditional funding rate mechanism: Unlike perpetual futures platforms, F(x) doesn’t rely on funding rates to balance long/short positions. The invariant formula (C = S + L) dynamically manages leverage and collateral, avoiding periodic payments between holders. xPOSITION and sPOSITION, as NFTs, are backed by collateral (stETH/WBTC for xPOSITION, fxUSD for sPOSITION), eliminating the need for counterparty funding fees.
Flash loans for leverage: When creating xPOSITION or sPOSITION, the protocol uses flash loans to borrow assets (e.g., USDC or stETH) for leverage, without ongoing borrowing costs. For example, $200 stETH with 7x leverage creates $1,200 fxUSD via a flash loan, with only a one-time opening fee (e.g., 0.5%), no ongoing funding rates.
Collateral yield offsets costs: xPOSITION collateral (e.g., stETH) generates staking yield, distributed to the stability pool or used to offset protocol fees. This reduces the effective cost of maintaining leveraged positions, offsetting funding rates. For sPOSITION, fxUSD collateral is stable, requiring no additional funding payments, with short positions managed via stability pool liquidity.
Stability pool and peg maintenance: The stability pool (holding fxUSD and USDC) absorbs market imbalances through arbitrage (buying fxUSD when undervalued, selling when overvalued), maintaining fxUSD’s 1:1 USD peg without funding rates. In rare cases, if fxUSD stays below peg for long, xPOSITION holders may pay a temporary funding fee to incentivize stability pool deposits, but this is minimal and resolved quickly via arbitrage or redemption.
Auto-rebalancing reduces liquidation costs: The rebalancing mechanism adjusts leverage when LTV exceeds safe thresholds (e.g., 88% for xPOSITION), burning fxUSD and selling collateral to maintain stability, avoiding forced liquidations and high funding rates common on other platforms. By keeping positions at safe leverage levels, the protocol reduces the need for costly manual interventions or funding rate adjustments.
Zero funding rates under normal conditions: In normal market conditions, xPOSITION and sPOSITION incur no funding rates, as the protocol relies on collateral-backed leverage and yield generation, not periodic payments. This is a key distinction from traditional perpetual futures, which may charge funding rates every few hours.
I’ll cover other protocol features in a future article. Thanks for reading!
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