# BaseX: Non-Liquidatable Leveraged Liquidity and Auto-Deleveraging Hooks

**Version 1.0**  
**May 2026**

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### Abstract

We present **BaseX (BASEX)**, a novel decentralized finance (DeFi) protocol engineered on Base L2 that introduces non-liquidatable leveraged ETH exposure ($5\times$ leverage) for spot token holders. Traditional leverage mechanisms (such as margin trading, perpetual futures, and centralized leverage) suffer from systemic constraints: individual liquidation risk, high holding costs (funding rates), and volatility decay due to constant-leverage rebalancing. 

BaseX bypasses these constraints by decoupling borrowing from individual user wallets and utilizing a protocol-level vault structure integrated with **Morpho Blue** and managed via **Uniswap v4 Hooks**. Users trade the spot token **BASEX**; the leveraged exposure lives in the protocol-owned **ETH5X** vault and its Uniswap v4 liquidity path.

By channeling a $0.3\%$ portion of all swap fees directly into the vault's debt buffer (ReserveEngine), BaseX implements an **auto-deleveraging flywheel**: trading volume continuously pays down USDC debt, lowering the vault's Loan-to-Value (LTV) ratio and driving the liquidation price downward. This whitepaper details the design, mathematical model, and competitive landscape of the BaseX protocol.

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## 1. Introduction & Market Inefficiencies

DeFi market participants seeking leveraged exposure to Ethereum (ETH) face a trilemma:

1. **Liquidation Vulnerability**: Perpetual DEXs (e.g., Hyperliquid, GMX) and centralized exchanges (CEXs) enforce individual liquidation thresholds. Sudden market liquidations or "wick downs" trigger cascading liquidations, wiping out retail traders.
2. **Eroding Carrying Costs (Funding Rates)**: In bull markets, perpetual long positions pay high funding rates to shorts (often exceeding $30\text{--}100\%\text{ APR}$). Over time, this carry cost destroys the capital efficiency of long-term leverage holders.
3. **Volatility Decay (Leveraged ETFs/Tokens)**: Traditional leveraged tokens (such as Index Coop's FLI) rebalance their debt ratio on a daily schedule to maintain a constant leverage factor (e.g., $2\times$). In range-bound markets, this daily "buy high, sell low" rebalancing erodes the Net Asset Value (NAV) of the token, making long-term holding unviable.

### The BaseX Paradigm Shift
BaseX resolves this trilemma by structuring leverage at the **pool level** instead of the **user level**. 

```mermaid
graph TD
    A[Trader buys BASEX spot token] --> B[No Individual Debt / No Personal LTV]
    B --> C[No Personal Liquidation Risk]
    D[Uniswap v4 AMM Volume] --> E[0.3% Fee to ReserveEngine]
    E --> F[USDC Debt Repayment to Morpho Blue]
    F --> G[Vault LTV Drops & Liquidation Price Decreases]
```

By pairing the spot ERC-20 token (**BASEX**) against **ETH5X**, a protocol-owned vault share representing leveraged ETH exposure, users get a simple spot-token experience while the debt remains isolated inside the vault. Since the individual has no loan, they cannot be liquidated. Since there are no funding rates charged to user wallets, there is no hourly funding drain. Finally, since the vault does not engage in daily constant-ratio rebalancing, volatility decay is minimized.

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## 2. Core Protocol Lifecycle

The life cycle of the BaseX protocol is divided into three distinct phases:

### Phase 1: Virtual Bonding Curve Launch
During the pre-graduation phase, BaseX tokens are traded along a virtual bonding curve. 
- Swaps occur between WETH and virtual reserves of BASEX.
- Users swap WETH for BASEX, accumulating WETH in the protocol's virtual curve.
- The virtual reserves are governed by a constant-product formula:
  $$(x + x_{virt})(y + y_{virt}) = k$$
  Where $x$ is the circulating supply of BASEX, $y$ is the accumulated WETH, and $x_{virt}, y_{virt}$ are virtual reserves injected to anchor the pricing.

### Phase 2: Graduation & Split
Once the bonding curve accumulates a net target of **$5.00\text{ WETH}$**, the token graduates. The gathered capital is split into four functional allocations to establish long-term protocol health:
1. **Main Uniswap v4 LP Seed ($4.00\text{ WETH}$ / $80.0\%$)**: Deposited into the ETH5X vault and paired with BASEX as seed liquidity for the main hook-enabled `BASEX/ETH5X` pool.
2. **ReserveEngine Seed ($0.70\text{ WETH}$ / $14.0\%$)**: Seed capital placed in the `ReserveEngine` as a debt buffer, emergency collateral buffer, and protocol safety reserve.
3. **Execution / Operations Buffer ($0.20\text{ WETH}$ / $4.0\%$)**: Held to cover graduation execution, UNCX locking cost, keeper gas, monitoring, and operating costs.
4. **ETH5X/WETH Reference Pricing Bootstrap ($0.10\text{ WETH}$ / $2.0\%$)**: Reserved for the keeper-balanced `ETH5X/WETH` reference-pricing path and related pricing infrastructure. BaseX does **not** rely on a public `BASEX/WETH` pricing pool for production pricing.

The main Uniswap v4 LP token is locked via **UNCX** for a minimum of $365\text{ days}$ to guarantee market depth.

### Phase 3: Uniswap v4 AMM & Morpho Blue Leverage
Post-graduation, trading is enabled on Uniswap v4. The counterparty asset for BASEX is **ETH5X**, a vault share token representing $5\times$ leveraged WETH exposure inside Morpho Blue.

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## 3. The $5\times$ Leverage Mechanism (`ETH5X` Vault)

The underlying value backing the **ETH5X** token is generated by looping borrow positions on Morpho Blue. 

### The Looping Mechanics
When WETH is deposited into the `KxETH5XVault`, the protocol recursively performs the following loop:
1. Deposit WETH as collateral.
2. Borrow USDC against the WETH.
3. Swap the borrowed USDC back into WETH.
4. Redeposit WETH.

This process is repeated $N$ times until the target leverage factor $L = 5$ is reached.

### LTV and Liquidation Safety Bounds
For a target leverage $L = 5\times$, the target Loan-to-Value (LTV) ratio is calculated as:
$$LTV_{target} = \frac{L - 1}{L} = \frac{5 - 1}{5} = 80\%$$

Morpho Blue offers market parameters with a **Liquidation LTV (LLTV)** of **$90\%$**. This leaves a significant cushion:
$$\text{Safety Buffer} = LLTV - LTV_{target} = 90\% - 80\% = 10\%$$

To trigger a protocol-level liquidation, the price of ETH would have to drop suddenly by:
$$\text{Price Drop Margin} = 1 - \frac{LTV_{target}}{LLTV} = 1 - \frac{80\%}{90\%} \approx 11.11\%$$

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## 4. The Auto-Deleveraging Hook & Debt Buffer

To safeguard the protocol vault from market downturns, BaseX introduces a **dynamic debt repayment hook** built on Uniswap v4.

### Hook Fee Allocation
The main `BASEX/ETH5X` pool uses a transparent all-in trading cost model:
- **$0.20\%$ Uniswap v4 LP fee** is distributed to liquidity providers to maintain deep liquidity.
- **$0.30\%$ hook reserve fee** is routed to the `ReserveEngine` debt buffer.
- **$0.20\%$ hook support fee** funds protocol operations, keeper infrastructure, monitoring, and front-end support.

The user-facing fee disclosure is therefore **$0.70\%$ + price impact**. Vault execution costs, when applicable, are handled through the official router and are not described as a separate headline swap fee.

### Mathematical Model of LTV Degradation
Let $D(0)$ be the initial USDC debt of the vault, $C(0)$ be the initial WETH collateral, and $V(t)$ be the cumulative trading volume of the pool up to time $t$. 

The accumulated repayment $R(t)$ routed to the `ReserveEngine` is:
$$R(t) = V(t) \cdot f_{re} = V(t) \cdot 0.003$$

Assuming keepers execute debt repayment by swapping WETH fees to USDC and paying down Morpho Blue debt, the outstanding debt $D(t)$ decreases over time:
$$D(t) = D(0) - \left( \frac{V(t) \cdot 0.003 \cdot P_{ETH}}{P_{USDC}} \right)$$

Consequently, the protocol's LTV decreases:
$$LTV(t) = \frac{D(t) \cdot P_{USDC}}{C(t) \cdot P_{ETH}} = \frac{D(0) \cdot P_{USDC} - 0.003 \cdot V(t) \cdot P_{ETH}}{C(0) \cdot P_{ETH} + \Delta C \cdot P_{ETH}}$$

This demonstrates that **trading volume directly drives down the protocol's leverage ratio**. As LTV falls:
1. The liquidation price threshold drops, expanding the safety margin.
2. The Net Asset Value (NAV) of the vault increases:
   $$NAV(t) = \frac{C(t) \cdot P_{ETH} - D(t) \cdot P_{USDC}}{S_{vault}}$$
   Where $S_{vault}$ is the fixed supply of vault shares.

```mermaid
sequenceDiagram
    participant Trader
    participant Uniswap_v4 as Uniswap v4 Hook Pool
    participant Engine as ReserveEngine
    participant Morpho as Morpho Blue
    
    Trader->>Uniswap_v4: Swaps BASEX / ETH5X
    Uniswap_v4->>Engine: Routes 0.3% Reserve Fee Value
    Engine->>Morpho: Swaps WETH to USDC & Repays Debt
    Note over Morpho: Debt decreases, LTV drops, Safety margin expands
```

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## 5. Comparative Analysis & Competitors

BaseX fundamentally differs from alternative leverage protocols and traditional margin solutions (collectively referred to as **Alts**). The following matrix highlights the structural advantages of BaseX:

| Feature / Dimension | BaseX (BASEX) | Alt Perpetual DEXs (Hyperliquid, GMX) | Alt Leveraged Tokens (Index Coop FLI) | Traditional CEX Margin (Binance, OKX) |
| :--- | :--- | :--- | :--- | :--- |
| **Asset Type** | Native Spot ERC-20 | Synthetic Position (vAMM/Orderbook) | Rebalancing Basket ERC-20 | Custodial Margin Account |
| **Max Leverage** | **$5\times$ WETH** | Up to $50\text{--}100\times$ | Capped at $2\times$ | Up to $3\text{--}10\times$ |
| **Individual Liquidation** | **None** (Zero liquidation risk for users) | **High** (Wiped out on short-term price spikes) | Low (Collateral liquidates at pool level) | **High** (Automated margin calls & liquidations) |
| **Funding Rates / Fees** | **$0\%$** (No holding costs) | **High Hourly Fees** (Varies dynamically) | High streaming fees ($\approx 1.95\%$ annually) | High daily borrow interest rates |
| **Volatility Decay** | **None** (Rebalances only on graduation) | N/A | **Severe** (Daily constant-ratio rebalancing) | None |
| **Network & Ecosystem** | **Base L2 Native** (Direct fiat-onramp, Farcaster integrations) | Isolated Appchain / Alt L1/L2s (requires bridging) | Mainnet-focused (Exorbitant Ethereum gas fees) | Centralized databases (Not on-chain) |
| **User Onboarding Barrier** | **Extremely Low** (Direct swap on Uniswap v4) | **High** (Requires bridging, custom wallets, L2 deposit) | Medium (High mainnet gas fees) | **High** (KYC checks, geographic restrictions) |
| **Base Ecosystem Support** | **High** (Leverages Uniswap v4 Hook & Morpho Blue L2 Lego) | None (Competitor L1/L2 ecosystems) | None (Ethereum L1-centric) | None |

### Key Structural Differentiation

### 1. BaseX vs. Alt Perpetual DEXs (e.g., Hyperliquid, GMX)
- **Carrying Costs (Funding Rates)**: Alt Perpetual DEXs charge continuous hourly funding rates. During bull markets, these rates can deplete a trader's capital by $20\text{--}50\%\text{ APR}$ simply for holding a long position. BaseX spot token holders pay **no funding rates**, making it a superior long-term vehicle.
- **Liquidation Cascades**: On Alt Perp DEXs, sudden market wicks trigger individual liquidation events, transferring user capital to liquidators or insurance funds. BaseX isolates leverage to the protocol vault level, making individual wallets immune to liquidation.
- **Onboarding and Ecosystem Accessibility**: Alt perps are typically deployed on standalone appchains or non-Base L2s, requiring users to bridge assets, manage custom network settings, and interact with complex trading panels. BaseX resides natively on Base L2, enabling any user to gain leverage exposure through a single token swap on Uniswap v4, capitalizing on the massive, native retail user base of Base.

### 2. BaseX vs. Alt Leveraged Tokens (e.g., Index Coop FLI)
- **Mitigation of Volatility Decay**: Alt leveraged tokens rebalance daily to maintain a fixed leverage ratio (e.g., $2\times$). During range-bound volatility, this constant "buy high, sell low" feedback loop permanently erodes the token's NAV. BaseX is built without daily constant-ratio rebalancing, eliminating volatility decay.
- **Leverage Efficiency**: Due to the collateral safety limits of lending platforms like Aave, Alt leveraged tokens are strictly capped at $2\times$ leverage to avoid liquidation. BaseX utilizes Morpho Blue's highly optimized, isolated lending parameters to safely support $5\times$ leverage.

### 3. Synergistic Alignment with Base L2 & Official Support
Base L2 is optimized for low-cost, high-velocity consumer DeFi. BaseX represents a showcase of "Base-native DeFi innovation" by orchestrating two prominent primitives: **Uniswap v4 Hooks** and **Morpho Blue**. Unlike Alt platforms that pull liquidity away to independent chains, BaseX contributes directly to Base L2's native TVL and transaction volume. This aligns perfectly with Base's official strategy to support consumer-facing DeFi primitives, Farcaster frame-compatible swaps, and gas-efficient financial tooling.

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## 6. Security, Oracle Safety, & ETH5X Reference Pricing

To prevent manipulation (such as flash loan attacks on the AMM to trigger vault imbalances), BaseX implements a dual-oracle validation framework.

### The Official Pricing Architecture
Because the primary trading pool is `BASEX/ETH5X`, external price aggregators may not immediately understand how to translate ETH5X into WETH or USD. BaseX therefore separates **real trading liquidity** from **reference pricing**:

1. **Primary trading source**: The canonical market is the Uniswap v4 `BASEX/ETH5X` pool. BASEX price discovery happens in this pool.
2. **ETH5X reference source**: A restricted, keeper-balanced `ETH5X/WETH` reference-pricing path tracks `KxETH5XVault.navWethPerKx()`. Its purpose is to expose the ETH value of ETH5X, not to create an alternative BASEX trading venue.
3. **USD conversion**: The official oracle and indexer combine the main-pool ratio with the ETH5X/WETH reference value and the Chainlink `ETH/USD` feed.

The official price formula is:

$$P_{BASEX/USD} = P_{BASEX/ETH5X} \times NAV_{ETH5X/WETH} \times P_{ETH/USD}$$

This avoids a public `BASEX/WETH` pricing pool that could pollute external indexing or become a misleading trading venue. The front end and Railway indexer use the official oracle/indexer path; DEX metadata can later point users to the canonical main pool and the ETH5X reference route.

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## 7. Conclusion

BaseX represents an evolutionary step in decentralized leverage. By utilizing Uniswap v4 Hooks to bridge trading activity with Morpho Blue debt markets, the protocol introduces a self-stabilizing DeFi primitive. Trading volume is transformed from a speculative metric into a defensive mechanism that systematically deleverages the protocol, offering retail participants a highly efficient, non-liquidatable, and zero-funding-cost vehicle for $5\times$ Ethereum exposure on Base L2.
