#termmax Last week I watched TermMax's Alpha Market all afternoon, and then suddenly realized something: this “zero settlement” leverage basically transfers liquidation risk to the liquidity providers.
I’m familiar with the liquidation logic of traditional leverage. If you open a long on GMX or Aave, and the price drops below the liquidation level, the protocol force-closes your position and part of your collateral is seized. That mechanism protects the protocol and the lenders, sacrificing the leveraged users. Alpha Market is the opposite: users pay a premium (Max Cost) to buy call options. Even if the price drops to zero, it won’t be liquidated—at most they lose the premium. But that protection doesn’t come out of thin air. Where does the risk go? $SPCXB
I reread the section about the AMM market-making mechanism. In Alpha Market, the liquidity provider is essentially selling call options. Users pay the premium to open positions; the liquidity provider collects the premium, but bears the risk of having to be exercised when prices rise. If ETH surges by 50%, users profit from exercising, and the liquidity provider must deliver the underlying asset at the agreed price—losses have no upper limit. This is similar to a Covered Call in the traditional options market, but in covered calls the seller holds spot assets to hedge at least partially. Here, can the liquidity provider hedge? The documentation doesn’t say. $SNDKB
I did some quick calculations. Suppose a liquidity provider puts $100,000 U into the pool with an annualized target return of 20%, meaning they need to earn $20,000 U in premium income in a year. If the premium rate averages 5%, then they need to take on a leveraged opening position amount of $400,000 U. But if 10% of that $400,000 U gets exercised, and that exercised portion is profitable by 30%, they would have to pay $12,000 U—so the return is cut in half. This model only stays profitable if most positions are not exercised or only have small profits. Once you hit a one-sided market, liquidity providers are very likely to lose money
Then I thought of another issue. TermMax’s Alpha Market doesn’t have a centralized market maker; liquidity depends entirely on retail users. Retail market makers’ risk awareness and hedging capability are far worse than those of professional institutions. If consecutive big market moves cause liquidity providers to lose, they’ll withdraw liquidity, and market depth will quickly dry up. At that point, users’ premium costs will skyrocket—or they may not even be able to open positions
As of now, TermMax’s TVL is $64 million and daily active users are 17,000, but data on Alpha Market liquidity distribution and exercise rates hasn’t been published yet. @TermMax