This example uses $ETH for readability, although Gains uses $WETH.
- On many centralized exchanges, ETH collateral opens a position with fixed size in the underlying asset. Current leverage changes with both the pair price and the ETH price, so the liquidation price can also move with ETH.
- On Gains, ETH collateral opens a position with a fixed size in ETH terms. The underlying token amount can vary, but the liquidation price remains independent from ETH price changes.
- Trader1 has 1 ETH as collateral on a CEX
- Trader2 has 1 ETH as collateral on Gains
- ETH price = $2,000
- Both traders want to open a 10x long position on the pair TIA
- TIA price = $10
On the centralized exchange, Trader 1 opens a 10x long on TIA. His position size is 2,000 TIA (notional position size = $20,000 at inception). This position size does not change during the life-cycle of the position. If ETH drops to $1,900, his position size is still 2,000 TIA. On the centralized exchange, current leverage depends on both ETH and TIA prices, and the liquidation price also depends on ETH. When ETH drops to $1,900, the trader’s liquidation price moves closer.
On Gains, Trader 2 opens a 10x long on TIA. His position size is 10 ETH (notional position size = $20,000) = 2,000 TIA. The position size in ETH does not change during the lifecycle of the position, but the TIA amount is variable. To illustrate this, assume the price of ETH is now $1,900 and TIA price remains unchanged at $10. His 10 ETH position is now equivalent to a $19,000 notional position, or 1,900 TIA. Conversely, if ETH increases to $2,100 while TIA is unchanged, his 10 ETH position is equivalent to a $21,000 notional position, or 2,100 TIA.
In scenario 1, ETH decreases and the notional position size decreases. The trader loses less if TIA falls, but also earns less if TIA rises. In scenario 2, ETH increases and the notional position size increases. The trader earns more if TIA rises, but also loses more if TIA falls. In both scenarios, the liquidation price remains unchanged because it is independent from ETH price movement. This makes liquidation risk easier to manage.