Spotlight: WETH
Highlighting execution differences between gTrade and a traditional CEX
For demonstration we use $ETH even though on gTrade it is $WETH
It is important to understand the subtle difference between CEXes and gTrade:
In most CEXes, the trader’s collateral is in ETH and this opens a position on a pair with a fixed position size in token amount (underlying pair). The current leverage of the position changes not only with the pair price, but also with ETH price. Therefore, the liquidation price is also changing with ETH price.
On gTrade, the trader’s collateral is also in ETH but they open a position on a pair with a fixed position size in ETH amount, which is variable in token amount (underlying pair). The main advantage of this design is that the liquidation price becomes independent of ETH price. Any changes on ETH price does not impact the current leverage of the position. As a result, managing the liquidation risk is a lot more intuitive and easier on gTrade.
Illustrative example :
Trader1 has 1 ETH as collateral on a CEX
Trader2 has 1 ETH as collateral on gTrade
ETH price = $2,000
Both traders want to open a 10x long position on the pair TIA
TIA price = $10
On the CEX, Trader 1 opens 10x leverage long in the pair 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.
However, on CEXes, the current leverage is a function of both ETH and TIA price, and the liquidation price is a function of ETH (and the funding). So when ETH drops to $1,900, trader’s liquidation price is lowered and get closer. This is not ideal to manage.
On gTrade, Trader 2 opens 10x leverage long in the pair 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 position size in TIA amount is variable.
To illustrate this, assume the price of ETH is now $1,900 and TIA price remains unchanged at $10.
Now his position size 10 ETH is equivalent to a notional position size of $19,000 = 1900 TIA
Conversely, if ETH price increases to $2,100 and TIA price is still unchanged, his position size of 10 ETH is equivalent to a notional position size of $21,000 = 2100 TIA.
In Scenario 1 where ETH price decreases, the notional position size also decreases : as a result, the trader will lose less money if TIA price declines, and will earn less money if TIA price increases.
In Scenario 2 where ETH prices increases, the notional position size also increases : this boosts the trader’s P&L in both direction, meaning if TIA price increases, he trader earns more; but if TIA price decreases, the trader also loses more.
But in both Scenarios, the powerful feature on gTrade is that the trader’s liquidation price remain unchanged in both scenarios : it is completely independent from price variation on ETH. This makes managing liquidation risk a lot easier.
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