Understanding Level Finance (LVL) in One Article

Introduction

Perpetual contracts dominate the derivatives market. Innovated by BitMEX, these contracts are prevalent in the cryptocurrency sector. In established markets, futures trading volume often surpasses spot trading. This pattern is evident in centralized derivatives but has yet to fully emerge in decentralized exchanges.

Since the collapse of FTX, on-chain exchanges have grown, with decentralized perpetual DEXs seeing consistent increases in users and capital. Over the past two years, dYdX has become a leader in this space, thanks to centralized exchange experiences, significant liquidity from market makers, and trading mining. They are now planning a v4 migration to the Cosmos ecosystem, aiming for true decentralization, which could alter the competitive landscape. Furthermore, with GMX’s counter-trend rise during bear markets, there’s renewed interest in the decentralized perpetual contracts market, leading to a “Real Yield” war. Projects like Gains Network, Kwenta, MUX Protocol, Rage Trade, and Level Finance have continuously innovated their economic models and mechanisms, vying for market share.

Level Finance can be seen as a GMX-like protocol on the BNB chain. While there are similarities with GMX, Level Finance has unique innovations that make it stand out.

Level Finance Overview

Level Finance was founded jointly by three founders, with the team remaining anonymous. The product was officially launched at the end of last year and is the largest decentralized perpetual contract trading platform on the BNB chain. In June, it was officially launched on Arbitrum. To date, the company has gone through four rounds of financing, raising $1,220,900 and selling 1,368,212 LVL tokens.

The product design is generally similar to the commonly used perpetual contract trading platforms in the market, adopting a liquidity pool model. LPs act as counterparties in trade collections and participate in obtaining a share of the transaction fees. The transaction prices are updated in real-time based on oracles. Key features of the protocol include:

• Introducing the LLP index token
• Launching a Tranche tiered risk management mechanism for LPs

The protocol uses a dual-token economic model with a fixed supply and diminishing emission. The token’s value is tied to the platform’s revenue growth. Upon its launch, the project introduced a series of liquidity incentives, staking rewards, and token auction events to attract capital and users. Users who hold ecosystem tokens can participate in receiving a share of the platform’s fee income, creating a positive feedback loop.

Operating Mechanism

Like most perpetual contract protocols in the market, Level Finance adopts the common pooled-funds trading model. The entire trading process is a game involving three parties: long positions, short positions, and Liquidity Providers (LP). The LP acts as the collective counterparty, participating to earn a share of the platform’s trading fees and LVL liquidity rewards. Currently, the platform supports four underlying assets: BTC, ETH, BNB, and CAKE. Users can choose to go long or short on the platform, with trading prices updated in real-time by the Chainlink oracle.

When LPs add liquidity to the Level Finance platform, they receive a corresponding amount of LP tokens, known as LLP tokens. The minted LLP tokens are automatically staked to earn returns. However, if users do not wish to stake, they can opt out of this automatic staking feature at the time of purchase. The platform uses the deposited funds to purchase BTC, ETH, BNB, and USDT assets. Each of these four assets has a target weight. Suppose the liquidity of a particular asset in the pool exceeds its target weight. In that case, the smart contract suppresses further deposits into that asset by increasing the minting fee, thus maintaining a balanced asset ratio in the pool. Hence, the LLP token can be viewed as an index token representing these five volatile assets. Holding LLP tokens also means bearing the risk associated with the price fluctuations of the different underlying assets.

image source：https://app.level.finance/liquidity

Tranche Risk Management Mechanism

Within the Level Finance system, LPs passively become trading counterparts. Drawing inspiration from bond rating concepts, the team introduced the “Tranche” mechanism for LP risk management. In traditional finance, a Tranche is a tool that segments collateralized bonds and similar assets into portfolios with different risk and return levels, meeting various user needs. Building on this, Level categorized the liquidity pool into three tiers, each with distinct risks and rewards:

1. Senior Tranche: Lowest risk and lowest APR

2. Mezzanine Tranche: Moderate risk and average APR

3. Junior Tranche: Highest risk and highest APR

image source：https://docs.level.finance/risk-management-for-liquidity-providers

Users providing liquidity receive LLP liquidity tokens and automatically stake them to earn rewards. Since the platform offers different Tranches, and each Tranche tier is isolated from the others, the value of the LLP tokens differs depending on the Tranche liquidity pool the user selects. All Tranches earn transaction fees from platform traders. These fee revenues are automatically added to the LLP tokens, leading to a price increase. Therefore, the total amount of LLP tokens within a Tranche remains constant, but its value does rise. Additionally, the LLPs acquired by users upon adding liquidity automatically stake to earn LVL token rewards. The number of LVL tokens released as rewards varies by Tranche, with the Senior Tranche offering 250 LVL daily, the Mezzanine Tranche 500 LVL daily, and the Junior Tranche releasing 500 LVL rewards daily.

image source：https://docs.level.finance/risk-management-for-liquidity-providers

The LLP token inherently encompasses the volatility risks of assets like BTC, ETH, and BNB. Different Tranches contain varying proportions of these volatile assets, leading to variations in actual risk levels. For instance, the Senior Tranche predominantly consists of mainstream assets BTC and ETH, with BNB representing only 2% and excluding CAKE entirely. In contrast, the Junior Tranche’s portfolio comprises a substantial 70% CAKE, which presents a significantly larger volatility risk. Of course, given the heightened risk the Junior Tranche bears, it also receives the highest share of profits.

Fee Structure

The fees charged by the Level platform are as follows:

1. A fee of 0.1% of the position size is levied for opening and closing perpetual contract trades.

2. There’s a liquidation fee of $5.

3. Traders pay a dynamic borrowing fee every hour, calculated based on asset utilization rates, with the maximum lending fee set at 0.01% per hour.

4. Asset Swap Fees: The base exchange fee for non-stablecoin trades is 0.25%. Level dynamically adjusts the Swap fees to incentivize funds in the pool that are not fully utilized, with the maximum fee set at 0.65%.

5. LP minting and burning fees: The base fee is 0.2%. Each asset’s fee is dynamically adjusted. When an asset deviates from its target weight, fees for minting and burning are adjusted to regulate asset liquidity, with the maximum fee set at 0.6%.

The platform allocates the fees collected from various channels. Level DAO is responsible for modifying the protocol fee parameters and distribution. The current allocation plan is as follows: 45% is distributed to LPs; 10% to LVL token stakers; 10% to LGO stakers; 5% is reserved for developers; and the remaining 30% is deposited into the DAO treasury.

image source：https://docs.level.finance/protocol-revenue

Economic Model

Level Finance operates on a dual-economic model. The native token of the protocol is LVL, with a total supply of 50 million tokens. The governance token of the protocol is LGO, with a total supply of 1,000 tokens, releasing 0.5 LGO daily.

image source：https://docs.level.finance/tokenomics/token-economics-overview

The LVL token, with a total of 50 million, operates on a fixed supply and decaying emission model. In February ‘23, the LEVEL DAO passed the LVL token release proposal, indicating that LVL releases will gradually decrease over time. The release plan consists of two parts: fixed releases and variable releases where the fixed release plan schedules 2,000 LVL tokens to be released daily across three tranches.

image source：https://docs.level.finance/tokenomics/lvl-utility-token

LGO serves as the governance token of the protocol. Holders of LGO constitute the LEVEL DAO, making decisions on various protocol matters. With a total supply of 1,000 LGO tokens, the team doesn’t pre-allocate LGOs. Everyone can earn LGO by staking LVL in the LVL DAO pool. 30% of the protocol’s fee income goes into the DAO treasury, and LGO holders can redeem liquid assets like BTC, ETH, BNB, and USDT using their LGO tokens. A 2-day redemption window opens every two weeks, and once redeemed, the corresponding LGO tokens are burnt.

image source：https://docs.level.finance/tokenomics/lvl-utility-token

A batch auction of LVL tokens refers to the treasury selling a fixed quantity of LVL to the public, where users can purchase LVL tokens using USDT. The DAO sets the maximum auction price through voting. Auctions take place every Tuesday at 2 p.m. US time and last for 24 hours. The final LVL auction price is determined by dividing the total USDT raised by the number of LVL tokens auctioned. An auction ends either when the time expires or when the LVL maximum price is reached. LVL tokens from the auction will be sent to accounts within 24 hours of the auction’s conclusion. If a user’s final bid exceeds the maximum price, the unused funds are refunded. After the auction, 25% of the USDT obtained is reserved for the LVL/USDT trading pair, while 75% is converted to Senior LLP.

image source：https://docs.level.finance/auctions/lvl-batch-auction

The LGO auction refers to a contract minting a fixed quantity of LGO for the community and selling them to LVL token holders. The auction follows Dutch auction principles, with bids incrementing from low to high. The DAO pre-sets the initial auction price and base price. Auctions occur every Tuesday at 2 p.m. US time and last 24 hours. Throughout the auction, the clearing price linearly decreases from the start. The auction price is determined by dividing the amount raised by the LGO supply. For every additional LVL added, the auction price rises. Once the auction price reaches the clearing price, the auction successfully concludes. If unsuccessful, all LVL tokens are refunded. After the auction, participants receive LGO tokens proportionally to the final successful auction price, and the LVL tokens used in the auction are destroyed.

image source：https://docs.level.finance/auctions/lgo-dutch-auction

Development Status

Currently, the product is deployed on both the BNB and Arbitrum chains. The BNB chain supports assets like BTC, ETH, and BNB, while the Arbitrum chain supports BTC, ETH, and ARB. According to the official website’s dashboard, the total value of Level Finance’s liquidity pool is $18,425,678, with the Senior asset pool having the highest locked value. Since its inception, the platform’s total trading volume has exceeded $22.5 billion.

image source：https://level.finance/

image source：https://app.level.finance/

Data shows a steady growth trend in Level’s trading volume. On the BNB chain, the trading volume surpassed $21.5 billion, while it’s approaching $1 billion on the Arbitrum chain.

image source：https://dune.com/levelfinance/all-in-one

Conclusion

Level Finance is deployed on both BNB and Arbitrum chains. In terms of product design, it resembles the common perpetual contract market. Its highlight is the risk management approach using tiered funds. Each tranche has varying proportions of volatile assets, with different incentives and revenue allocations. Hence, LPs can add liquidity to the tranche pools that align with their risk preferences, receive the corresponding LLP index tokens, and share 45% of the fee income and mining rewards. These tiered tranches don’t eliminate the risks LPs assume as counterparties in trades; they also bear the risks associated with price fluctuations of assets within the combination.

The protocol employs a dual-token economic model, following the “fixed supply, decaying emission” principle. The value of the tokens is intrinsically tied to the platform’s revenue growth. LVL and LGO token holders can participate and share in the platform’s fee income. Since its launch, the project has rolled out a series of liquidity incentives, staking rewards, trading incentives, referral programs, and token auctions to attract capital and users, thus forming a positive feedback loop.

GMX, the dark horse, has grown against the bear market trend, stirring up another wave of development in the perpetual contract arena. The market has seen the rise of numerous GMX-like projects, vying for capital and users with generous mining rewards. Level Finance, a GMX-like project on the BSC chain, attracted capital in its early days with token mining incentives and has seen good growth momentum.