Leveraged Long Trades

Leveraged longs have a payoff that returns 2-100x the nominal value of the trade at the time it was placed. Returns are denominated in USD but settled entirely in the Market's underlying token; that token is also used as collateral.

Instead of a funding rate, these trades use strike prices. The strike price represents the value at which the trade breaks even and is at least the current oracle price. As a trader increases their leverage, the AMM's risk aversion will also cause the strike price to rise. For example, if ETH is currently priced at $1,280, then a 5x leveraged long on ETH may have a strike price of $1,285, while a 100x leveraged long may have a strike price of $1,300.

Returns are simple:

• If the token's price goes up —> the trader receives more tokens back (upon closing the trade)

• If the token's price goes down —> the trader is liquidated and loses their token collateral

Kubo manages risk by offering orders with varying strike prices. Although orders may sometimes be offered at a slight premium relative to market price, Kubo's payouts are predictable; they're not subject to the balance of long/short orders in the system after the trade has been placed, as is the case with funding rates in order books.

Who Might Be Interested in Leveraged Longs:

• Degens like to ape with leverage.

• Professional traders can combine instruments to construct sophisticated positions.

• Options market makers who need to hedge calls/puts have offered OTC.

Liquidations

Leveraged longs also have a liquidation price based on the strike price and the amount of leverage used. Reverting to the example above, the 100x leveraged trade might have a liquidation price of $1,287 (i.e., 1% lower than the strike price), and the 5x leveraged trade would have a liquidation price of $1,028 (20% lower than the strike price).

Borrowing inspiration from the DAI model, Kubo relies on decentralized "tattlers" to present the AMM with verifiable evidence that a trade should be liquidated. 10% of the trade's input value is reserved for distribution to tattlers (which can be the trader). As per the AMM's utility function, this "tattling fee" results in slightly higher strike prices for traders.

Note that if the strike price rises above the current oracle price, the trader will be notified that the trade is highly likely to be liquidated in a set timeframe unless prices change in their favor.

Positions can also be liquidated in the unlikely event of a market's bankruptcy. Long trades can be liquidated at minimum leverage if the AMM is "long" bankrupt. However, Kubo has explicit bankruptcy rules that discourage traders from maintaining trades that could cause bankruptcy. Also, note that each token has its own isolated market, so one market's bankruptcy will not cascade to other markets.

Integrations

Leveraged long trades will be the first Kubo feature released on Susa along with repo trades, with liquidity pools and stablecoin vaults to follow soon after.