Rebalancing Leverage: from ‘Rekt’ to Reallocation

Leverage is a powerful tool. But irresponsible use does more harm than good to the market. Here’s how Tranchess’ Rebalancing Protocol helps change that with Bishops, Queens and Rooks.


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key takeaways

  • In the last few weeks major exchanges have reduced the amount of leverage available to retail traders citing regulatory concern
  • Tranchess seeks to offer leverage to traders but also doing so in a responsible manner with no forced liquidations

There once was a race to the moon with the leverage exchanges offered to their retail traders. However, in the last few weeks major exchanges have reduced the amount of leverage available to retail traders citing regulatory concern.

In the not-so-distant past, bitcoin billionaire and BitMEX founder Arthur Hayes bragged about his company offering retail traders 100x leverage, a number soon matched by Binance and FTX.

But in July 2019, the CFTC opened an investigation into the Seychelles-based BitMEX for allowing US traders to trade on its platform. In May, the Musk-inspired crypto crash and cascading series of sell-offs liquidated leveraged positions, further dragging down the price to dip under $30,000.

During May’s crash, the drop was so quick that some traders couldn’t react fast enough to close their positions, thereby finding themselves “rekt.”

Looking back, “having no cap on leverage isn’t very wise,” Danny Chong, co-founder of Tranchess told Blockworks in an interview.  

He pointed out that compounding the problem was the fact that web servers hosting some exchanges crumbled under the pressure. This meant that even if traders were online, they couldn’t order a stop to the madness. 

“You could see this happening on the bar charts, with the fast sales,” Chong said. “It was a huge loss for exchanges.”

While BitMEX still offers 100x leverage, FTX and Binance had a change of heart — or a stern talking to by regulators — and decided to cap leverage at 20x for most retail traders. 

There’s always a place for leverage

Leverage is not a bad thing. It’s a tool that has been used in trading since the birth of modern markets. It’s just that when used irresponsibly and traders get “rekt,” regulators aren’t going to be happy and will start to intervene.

This is where Tranchess comes in. Tranchess proposes something different compared to the wild west of leverage that was previously offered by some exchanges.

Tranchess is a protocol composed of subunits with chess-themed names. Queen, the main fund, which is a simple bitcoin tracking fund where each token simply tracks the price of bitcoin. Next is Bishop, which is a USDC token that creates yield for its holders. Bishop can create yield because of the next token, Rook, which borrows from Bishop to buy shares of Queen on leverage.

In the end, Rook holders get leveraged exposure to bitcoin via Queen, while holders of Bishop generate yield through extending credit. 

And what if there’s a precarious drop in the price of bitcoin? Chong explained the protocol has a rebalancing mechanism in place which will attempt to reallocate assets in order to preserve the position of Rook holders, and the yield generation of Bishop lenders.

Plus, Chong said that the maximum leverage available is 2x (currently it’s at 1.61x per a decision by holders of its governance token), meaning that there’s not quite the same risk owing to lengthy lines of leverage as there would be from similar products offered by exchanges. 

In the end the market hasn’t completely decided what to do with Tranchess and its offerings.

Its token is trading at $1.31, down 22% from al all-time high of $1.71 from earlier this month, according to CoinGecko, but its total value locked is approaching $500 million.

Of course the market gyrations of DeFi tokens in their early days aren’t indicative of their actual value, but it will be interesting to see if the market will embrace tools for more moderate leveraged trading. 

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