SOV Max Leverage Update

Brought to you by Baas

February 7, 2022

The goal of Sovryn is to empower a community of like minded individuals who seek self-sovereignty. To do so, as the platform grows, we need to practice and facilitate sound risk management principles while maximizing earning opportunities for users of the platform. 

SOV holders are fully aware that markets have seen high volatility lately. However, we all wish to encourage longevity and long-term thinking as the community grows.

In line with this perspective, we have decided to reduce the maximum leverage when margin trading long SOV positions to ‘2x’.

Please note that this will NOT affect existing positions

Cascading Liquidations

A major factor of the high volatility in the SOV price is leveraged long positions. Going long at high leverage can move the SOV price up quickly, but down even faster. Since we introduced margin trading on SOV pairs, we have seen several occurrences of cascading liquidations. The last one being on Monday 31 January.

When a position gets liquidated, its collateral gets bought up by those on the other side of the trade, who then swap it on the market for a profit. 

So, for example, if a long SOV position against XUSD gets liquidated, the ‘liquidators’ provide XUSD to the protocol to pay back their loan and receive the collateral in SOV in return. Most ‘liquidators’ then directly sell the SOV on the market to get their XUSD back, with a profit, and continue liquidating.

Cascading liquidations happen if one, potentially large, position gets liquidated and its collateral swapped, leading to a price depreciation. This price depreciation pushes other open positions under water. If these positions then get liquidated, the price gets pushed down further, leading to new liquidations.

The higher the leverage, the higher the chance of getting one’s position liquidated.

Depending on the volume of open positions with liquidation levels in a similar range, the price drop can be dramatic!

We believe that this decision will help maintain SOV on its natural growth trajectory.

#StaySovryn folks!

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