Estimating Long and Short Positions

Traders can estimate long and short positions by leveraging inactive liquidity bins through borrowing. This mechanism provides tools to speculate on price movements or hedge risk in a fully collateralized and DeFi-native environment.

Shorting: A Bearish Strategy

Shorting involves borrowing base assets (e.g., NAD) at a higher bin price, expecting the market price to decrease. The goal is to sell the borrowed assets at the current market price and repurchase them later at a lower price for a profit.

Example (USDC/NAD Pair):

• Setup:

  • Current Market Price: 1400 USDC/NAD.

  • Borrow Bin: 1900 USDC/NAD.

  • Collateral: 5700 USDC.

  • Borrowed Amount: 3 NAD.

• Execution:

  • Sell the 3 NAD at the current market price of 1400 USDC/NAD, receiving 4200 USDC.

  • Hold the USDC and wait for the market price to drop below 1400 USDC/NAD.

• Profitability:

  • If the price drops to 1000 USDC/NAD:

    • Use the 4200 USDC to buy NAD at 1000 USDC/NAD, acquiring 4.2 NAD.

    • Repay the borrowed 3 NAD.

    • Retrieve the 5700 USDC collateral.

    • Profit: 1.2 NAD (remaining after repayment)

$\text{Leverage Achieved} = \frac{\text{Collateral (5700 USDC)} + \text{Asset Bought (4200 USDC)}}{\text{Collateral (5700 USDC)}}= 1.7x$

Longing: A Bullish Strategy

Longing involves borrowing quote assets (e.g., USDC) at a lower bin price, expecting the market price to increase. The goal is to buy the base asset now and sell it later at a higher price.

Example (USDC/NAD Pair):

• Setup:

  • Current Market Price: 1400 USDC/NAD.

  • Borrow Bin: 1000 USDC/NAD.

  • Collateral: 4 NAD.

  • Borrowed Amount: 4000 USDC.

• Execution:

  • Use the borrowed 4000 USDC to buy NAD at the current market price of 1400 USDC/NAD, acquiring 2.85 NAD.

  • Hold the NAD and wait for the market price to rise above 1400 USDC/NAD.

• Profitability:

  • If the price rises to 1900 USDC/NAD:

    • Sell 2.85 NAD at 1900 USDC/NAD, receiving 5415 USDC.

    • Repay the borrowed 4000 USDC.

    • Retrieve the 4 NAD collateral.

    • Profit: 1415 USDC (remaining after repayment).

$\text{Leverage Achieved} = \frac{\text{Collateral (4 NAD)} + \text{Asset Bought (2.85 NAD)}}{\text{Collateral (4 NAD)}}= 1.7x$

Note: Higher leverage can be achieved by looping positions (borrowing and swapping repeatedly), but this increases debt costs due to utilization fees with each loop.

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Note: For detailed information on borrowing mechanics—such as how fees are calculated, collateralization dynamics, and the 7-day expiry model—refer to the [Borrowing Page]