Position Mining Generates Profitable Yield. Why?

Derivation Lab
5 min readFeb 20, 2023

Derify is a decentralized derivative protocol that has emerged with an innovative automated market maker mechanism. Compared to other DeFi derivative protocols, you can tell with the core team’s strong understandings in Crypto through Derify’s liquidity provision mechanism, risk management, and tokenomics. As a result, even under a bear market conditions, Derify can still provide profitable yield for users who hold positions to participate in position mining.

First of all, the yield from positions mining on Derify is settled in BUSD. Many derivative protocols offer “high” rewards, but when you investigate in those cases, two issues become apparent.

  1. The majority of these protocols’ yield farming APY rewards are given out in tokens issued by the protocol itself. This creates a major issue because these protocols’ tokenomics are generally highly inflationary. In a bear market, lack of liquidity in the market and new capital inflows inevitably result in death spiral for these tokens. The token prices can fall rapidly and it becomes difficult to recover.
  2. In addition, the stablecoin yield rates in the yield farming reward calculations of these protocols are actually very low. Under high APY figures, most of the rewards are in the form of the protocol’s native token, while the stablecoin rewards are actually very low. This is true not only for decentralized derivative protocols but also for decentralized lending protocols such as AAVE and Compound.

So why is Derify able to provide a high yield in stablecoin rewards for positions mining? Is it a Ponzi model?

First of all, Derify adheres to returning 100% of the platform’s income to the traders, brokers, and token holders within the ecosystem. Therefore, the high yield from position mining was pre-planned in the mechanism design, rather than being a Ponzi model. For position holders, the high yield funds come entirely from the platform’s income, which is healthy and sustainable.

  1. 30% of the platform’s income is rewarded to the users who hold positions; 30% of the platform’s income is rewarded to the brokers who the position holders belongs to; and the rest of the platform’s income (40%) is injected into the insurance pool.
  2. In addition to providing protection for the system net loss, any excess funds in the insurance pool (20% of the pool’s funds) are injected into a buyback fund to repurchase and burn $DRF.

Compared to other protocols, apart from the necessary risk management measure of injecting part of the income into the insurance pool, the Derify development team has no reservations about the protocol’s revenue. The excess funds in the insurance pool are also used to repurchase and burn $DRF to increase investors’ confidence.

Adhering to the principle of benefiting every role in the ecosystem as much as possible, the Derify development team does not charge any fees. This mechanism design is aimed at providing better economic returns for Derify’s holders, brokers, and investors.

Participating in positions mining is very simple — just open a position and hold it. You will automatically become a position holder and liquidity provider for Derify. This is because Derify’s hAMM mechanism, hedged automated market maker, which operates on the principle that opening a position is equivalent to providing liquidity. The platform fee is 0.1%, and when a trade is made, 30% of the trader’s fee is automatically distributed to the holders.

The yield from positions mining has two source of income: fee (BUSD) rewards and $DRF rewards. The system automatically distributes 30% (For distribution parameters details) of the previous day’s fee income for a particular trading pair, based on the proportion of holdings, to the holders of that trading pair on the current day. For example, if the BTC trading pair generated a fee income of 100 BUSD on the previous day, and the total system holding for BTC today is 10,000 BUSD, then the average user holding a BTC position of 100 BUSD can earn a mining yield of 0.3 BUSD (100/10,000 BUSD * 100 * 30%)

As a position holder, you can choose to participate in positions mining by opening a 1-way position (long or short). Holders need to maintain their positions open in order to receive rewards from the previous day. Given the risks of high volatility and liquidation when holding a 1-way position for a long time in derivatives trading, Derify has ingeniously created a function called “2-way positions” leveraging the hAMM mechanism. This allows users to open both long and short positions for the same trading pair, with the same position size, leverage, and price at the same time. Holders of 2-way positions will not suffer losses due to the price changes of the trading pair and can easily receive incomes from other users opening or closing trades. Holders can use leverage to increase their position size, with larger positions leading to higher yields. Derify’s protocol provides a maximum leverage of 75X, which means that with $1,000 in margin, users can have a position with a value of $75,000, increasing the capital utilization ratio by 75 times.

This approach is almost risk-free. The reason is as follows: the margin ratio = margin balance/total position. In the case of 2-way positions, the margin balance remains the same, while the total position changes with the price fluctuations of the underlying asset. Derify’s maintainance margin ratio is 1%. If a user’s margin ratio falls below this red line, it will trigger an ADL. Therefore, holders need to ensure that their margin ratio is kept above 1% as much as possible.

For example, if the price of BTC is $20,000, a trader puts up $5,000 as margin and uses 30X leverage to open a 2-way position. The margin ratio is $5,000/7.5BTC = $5,000/$150,000 = 3.33%; When the price of BTC rises to $66,666, the margin ratio becomes $5,000/7.5BTC = $5,000/$500,000 = 1%, which triggers an ADL. Therefore, users are good to go as long as the price of BTC does not rise to $66,666. From the perspective of the price fluctuations of the trading pair, the price of BTC has risen by 333% from $20,000 to $66,666. Therefore, position holders will have enough time to protect their positions based on changes in the price before the price of BTC reaches to $66,666. In summary, given that holders can control their margin ratios, they should try to maximize their capital utilization by using leverage to increase their returns.

High leverage → high capital utilization → larger position size → high returns

In addition to the current Airdrop Plan, Derify will also launch new marketing plans in the future to provide $DRF rewards for traders and holders. This will be an icing on the cake for the current high APY (BUSD) yield. However, Derify believes that using native tokens as the only reward for the protocol will ultimately be counterproductive and harm the protocol development in the long-term. Therefore, the Derify core team will approach and handle this issue prudently.