Liquidation-Free Leverage let's users have all the benefits of leverage, but can avoid liquidation by pay a funding rate instead.
Itos users can apply it to any positions they want, and can freely opt into and out of liquidation protection at will. No epochs, no lock-ups, no expiry.
Normally, when someone uses leverage they deposit a collateral to open a position worth more than their collateral. If the position loses more than their collateral's worth of value they get liquidated and the user loses any chance of recovering their loss.
Instead that person could have chosen to opt into liquidation protection. Perhaps they're using a perp, or just borrowing and lending, regardless with a single click they can opt in and start paying a minor reservation fee. This fee is typically small, and the real premium is only paid when they're actually close to liquidation.
Once they're near the liquidation price the fee becomes much larger, but keeps their position alive. Once they're past the liquidation price, the fee actually goes back to the small reservation amount and their position remains alive. Under the hood, the perpetual synthetic options-like positions we open for the user have been exercised and thus no longer pay the exercise costs. At any point the user can close their position and retreive any remaining collateral.
If afterwards, the price recovers then they pay the exercise fee again on the way back up and their position is once again healthy. They can then choose to take off the liquidation protection, close the position for a profit, or make no changes at all.
Borrow & Lending
A user lending 5000 USDC and borrows 1 ETH worth 2000 USDC.
They opted into liquidation protection with a default setting of 5%.
They pay 15 cents a day for reserving this protection.
The position normally liquidates if the price of ETH goes to 5000 USDC.
The default liquidation protection range is thus 4750 USDC to 5000 USDC.
The price of ETH goes up to 4000 USDC. We're approaching the liquidation price, but nothing changes yet.
The price of ETH goes to 4800 USDC. They're in the protection range which means they start paying higher fees. A typical fee rate is around 30 cents an hour they're in range.
ETH goes to the moon and hits 6000 USDC. They're no longer in range so they're back to paying only 5 cents a day. At any point the user can close the position and retrieve any remaining collateral if they'd like.
ETH goes back down to 3000 USDC. They're overcollateralized again and the user can withdraw up to 2000 of their USDC lend if they'd like as if nothing happened.