The number of DEXs on Solana are growing, and so are the users on it. Whenever a new protocol launches, it attracts a flock of users — institutional and retail traders — who want to increase their portfolio’s exposure to the latest DeFi instruments and derivatives.
Now for the average protocol, having more users may always seem like a good thing. Platforms end up recording more TVL on their LPs, and increased trading activity equal more fees collected as revenue. Win-win, right?
Well, not really.
The Curious Case of Missing Liquidity
While the number of protocols (and users) increasing may feel like a benefit, in the long run, it causes the amount of liquidity available to traders to decrease.
Confused? Let me explain.
DeFi protocols run as isolated markets, and each protocol offers only a specific set of products to invest in. Traders who want to diversify their portfolio’s exposure are forced to distribute their capital across various such isolated protocols. This causes the entire DeFi ecosystem to become less capital efficient, as the margin requirements are also isolated. Hence, regardless of extensive research or trading skills, if you are a trader with your capital fragmented across different protocols, you are already starting off at a disadvantage.
In fact, this liquidity fragmentation has been a long-standing complication in crypto, unlike tradfi, where it is barely noticeable.
In traditional finance, different financial instruments are hosted on a single centralized platform. Most such platforms act as brokers, providing traders with leverage, advanced risk management, and cross-margin options.
Elevating Your Trading Experience
Spreading your capital across multiple protocols leads to two issues:
- Less available capital; since liquidity is spread across protocols, you will not have enough capital in one place for leveraged positions
- Bad user experience for the trader; no one wants to constantly transfer capital between protocols to settle and change positions
The first problem could be solved by implementing a form of cross-protocol communication layer/standard. If protocols could connect and share their users’ portfolio health with each other, users could be allowed to utilize their liquidity and positions more efficiently across the ecosystem.
The second problem is more abstract.
DeFi trading tools right now are very fragmented. Traders find it very hard to monitor portfolio risk across their wallet assets and active protocol positions. The data available is not standardized, and having to keep track of all capital (deployed and undeployed) makes it hard to do appropriate risk management. And without risk management, the chances of your position being liquidated increases exponentially.
So how do you create a better trading environment without sacrificing the decentralized nature of the protocol?
For DeFi in Solana, Xenon is the answer to these problems. By making DeFi as composable as possible, Xenon removes the need for scattering your capital throughout multiple avenues — just deposit all your capital on Xenon’s Unified Margin Account and start trading across different protocols in the most capital efficient way.
Traders on Xenon can manage different positions on multiple DEXes, hedge these positions on another protocol, and use their idle assets and unused capital on one protocol for leverage/yield on another, all via a single account on Xenon.
A unified account operating on composable protocol architecture also enables more novel ways to create collateral. Consider this example: You want to place a higher leverage trade on protocol A, but you do not have enough tokens for collateral. You have a few tokens staked on protocol B, but you don’t want to remove them just yet.
This scenario is zero trouble for you with Xenon. Since these protocols are composed over each other with Xenon, you can increase your leverage on protocol A by using your staked position on protocol B as collateral.
Portfolio Margining with Xenon
One of the main benefits of unifying trader-side infrastructure with portfolio composability is the ability to do portfolio margining.
In portfolio margining, all supported positions and assets across the ecosystem are treated as one joint collateral. The net value and underlying risk of this consolidated collateral is calculated, and margin requirements are set. You can now use this unified collateral for opening positions on different protocols on the decided margins.
Portfolio margining on Xenon also works in the same way. By exposing all your positions and assets to your Margin Account, you can potentially lower your margin requirement and liquidation risk, while gaining more capital efficiency — much higher than what could be achieved with cross-margining.
So the next time you want to set up a delta spread portfolio, simply use your existing profitable positions as collateral to get leverage for your hedged positions.
The Road Ahead
With portfolio margining, a single account can trade millions in notional value with just a couple thousand dollars (leverage FTW) — and this is just scratching the surface on what derivative composability can achieve.
Composability is the future, and we’re shaping it for Solana, one composed protocol at a time.