Contango: A Forward-looking Approach to Leverage

Introduction

Composability is DeFi’s greatest strength. Lucrative yields from Ethena and Eigenlayer have rejuvenated the sector and helped struggling primitives find product market fit. DeFi’s best performers over the past 6 months have been projects that have successfully built around these new yield avenues. Harnessing composability will be one of the best ways to capture value moving forward.

Contango is an emerging project sitting at the intersection of lending and leverage trading. In this memo, we will evaluate Contango’s approach to leverage trading and explore how it can take advantage of a dynamic DeFi ecosystem.

Contango Unchained

Contango began as an expirable futures protocol built on top of fixed rate lending markets such as Yield Protocol and Notional Finance. We touched on Contango in our Interest Rate Derivatives report last year. Fixed rate lending has struggled since the report, significantly hindering Contango’s growth. After Yield protocol shut down, Contango reinvented themselves with a leverage trading tool called cPerps. cPerps (Contango Perps) allow users to leverage trade crypto assets via automated looping on money markets with flash loans.

Recursive borrowing has always been a popular yield farming strategy in DeFi. Users may loop pegged assets such as wstETH to enhance yield, or simply loop a CDP on Maker to mimic margin trading. Manually constructing these positions is tedious and gas intensive. It can also be difficult to unwind these positions in a timely manner, whether due to a stressed peg or calibrating portfolio delta. Instadapp and DefiSaver have developed looping automation tools in the past, but these were limited in scope and not refined for a trading experience.

cPerps abstract all of the complexity away from looping. Users choose their desired leverage, within the constraints of each money market’s LTV (usually 5-9x). The protocol borrows the desired quote currency needed to achieve a given leverage, swaps it for the base currency and lends it back to the money market. It then borrows enough of the base currency to pay back the flash loan.

The end result is a polished trading experience that closely resembles perps trading, with a few unique characteristics:

• Liquidity comes from mo