Shorting Assets
What is short selling?
Shorting is a strategy that allows you to profit from the decline in the price of an asset. It involves:
Borrowing an asset,
Selling it on the market at the current price,
Then buying it back later at a lower price to repay the loan—keeping the difference as profit.
Note: However, if the price of the asset goes up instead of down, you will incur a loss.
Here are 2 key use cases:
Speculation
Shorting provides an opportunity to speculate on specific tokens that you believe may experience a decline in value.
For example, if you believe the price of ABC will decline over the next few weeks, you can use Tectonic’s short feature to long USDC against ABC. First, deposit 100 USDC tokens (worth $100), borrow 50 ABC tokens (worth $50), swap ABC for more USDC, and deposit it back on Tectonic. If ABC’s price declines by 50%, you can buy back the 50 tokens for $25. That means when you close out your debt, you would have profited $25. Of course, the risk is prices moving against you instead, so manage risk accordingly.
Hedging
By shorting tokens on Tectonic, users can effectively hedge their existing crypto exposure without having to sell the initial assets.
For example, you may be long-term bullish on token ABC, but are concerned about potential short-term price volatility. To hedge against possible near-term declines in ABC’s price, you can use our shorting tool to hedge your exposure on Tectonic. Similar to the example above, short ABC against USDC. If ABC declines in price, this hedge will provide you with some downside protection. If, however, ABC’s price rises, this strategy will eat into some of the upside you would have gotten from just longing the asset.
How does shorting work on Tectonic?
Similar to Repay with Collateral and Collateral Swap, our Shorting feature also utilises the deferLiquidityCheck() function to roll multiple steps into a single transaction. Here's how:
Step 1: User confirms to long token A and short token B
Step 2: On the backend, Tectonic will borrow token B and swap it for Token A on an integrated DEX (currently VVS Finance or WOWMAX are available for selection). No liquidity check conducted at this point
Step 3: The newly swapped Token A will be used to mint tToken A, and deposited back onto Tectonic as collateral
Step 4: Liquidity check is now conducted
In summary:
Long = supplying a token (e.g. token A) for use as collateral on Tectonic
Short = borrowing another token (e.g. token B), swapping it to token A and redepositing it back on Tectonic
Definitions
Borrowing level
Lava bar of a user’s entire position within an isolated pool
Borrowing level = Total amount of Debt in USD / (sum(Amount of each collateral in USD * each collateral's respective Collateral factor))
Leverage
A user's entire leverage position within an isolated pool
Leverage = 1 / (1 - LTV)
Final Long Balance
The final amount to be supplied as collateral (i.e. long) on Tectonic following the swap
Final Short Balance
The final amount to be borrowed (i.e. shorted) on Tectonic following the swap
Net APY
Weighted APY based on a user's chosen long and short asset
Net APY = [(Long asset in USD * net Supply APY) - (Short asset in USD * net Borrow APY)] / (Long asset in USD)
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