How FWX works
Last updated
Last updated
The FWX platform offers two main features: the decentralized derivative exchange (DDEX) and the lending and borrowing pools (LBPs). Both of these functions are closely connected, as the DDEX relies on the liquidity provided by the pools, while the LBPs benefit from the actual borrowing demand and real profits generated by derivative trading orders. In essence, the DDEX and LBPs work together to create a robust and interconnected system that benefits all users of the FWX platform.
FWX serves as the counterparty for all traders and employs an advanced hedging algorithm known as the Automated Position Hedger (APH) to mitigate the risk associated with traders' profit and loss. In other words, unlike the conventional order-book-based double auction matching mechanism, FWX allows traders to trade directly against the platform. Nevertheless, the platform utilizes an on-chain hedging strategy to effectively eliminate risk.
Users can lend tokens to FWX, and each token possesses its distinct lending pool, similar to Compound Finance, and Aave. The liquidity in the lending pools can be borrowed over-collateralized by any other users, and can be used by FWX protocol to hedge against the futures positions. Thus, liquidity providers earn yields from both the interest paid by borrowers and the transaction fees paid by derivatives traders. The interest from the borrower is influenced by the relationship between the demand for borrowing and the supply of lending tokens.
FWX's two main features, the decentralized derivative exchange (DDEX) and lending and borrowing pools (LBPs), directly and indirectly, support each other. The effective functioning of FWX DDEX relies heavily on deep liquidity pools. The tokens in these pools are borrowed by the APH protocol to replicate the payout of futures contracts, thereby eliminating any risk associated with price movements. FWX DDEX generates real borrowing demand from LBPs, resulting in actual revenue for lenders, making FWX LBPs more sustainable.
Unlike other lending and borrowing platforms that attract liquidity by giving away governance tokens in addition to real interest, FWX DDEX enables FWX LBP to attract real borrowing demand and grow sustainably. This is because as trading volume increases, more tokens are borrowed from corresponding LBPs, resulting in an increase in their lending APRs. FWX lending APRs are notably higher than others since they include interest received from borrowers, funding fees paid by trading, and part of the trading fees. This attracts liquidity from other investors and yield-farming platforms, deepening liquidity in FWX's LBPs.
The figure below illustrates the relationship between the utilization rate and the platform APRs for different futures trading volumes with a lending pool size of $5 million. The solid line shows the relationship between the utilization rate and the borrowing APR. It is noticeable that the borrowing APR rises at an increasing rate. This encourages users to borrow tokens and take trading orders on the platform when the utilization rate is low and prevents insolvency. The lending APRs with different daily trading volumes in futures are illustrated by dashed lines. It can be seen that with no trading volume in futures at all, the lending APR is lower than the borrowing APR. However, with only $500,000 trading volume in a day, the lending rate will be higher, with the initial rate above 20%. With a trading volume of $2 million, the lending APR is higher than 100% for the utilization rate above 55%.
