Short while growing with Alpaca Finance

Alpaca Finance allows users to take short positions in agriculture and earn potential profits even during market downturns.

Short selling on Alpaca Finance

Alpaca Finance offers users many techniques to generate returns in the Decentralized Finance (Defi) space. The leveraged yield farming platform on BNB Chain allows users to create strategies to customize their asset exposure and generate profits. Some of these strategies include “desire” and “short circuiting.”

Desire is a common method for traders, where profits are made by holding assets that increase in price over time. Users who use this strategy may also suffer losses if the price of the assets goes down.

Short selling, on the other hand, involves selling assets ahead of time to make a profit when the price drops.

Short selling can be very lucrative on Alpaca, unlike most derivatives exchanges where users lose their funds when their short positions fail to return a profit whenever the price of the asset fails to fall.

The difference is this: Alpaca allows users to farm and short the market at the same time.

Source

With Alpaca Finance, users can short borrowed assets. This can be done in just a few steps by depositing the desired amount in the specific farm and setting a leverage greater than 2x, which means you are borrowing more than the amount of funds you are depositing as collateral. This action ensures that Alpaca Finance lends you enough funds to create a net short position and generate profits if the price of the borrowed asset drops.

In summary, farming with more than 2x leverage automatically creates a short position in the borrowed asset, which can generate profits in the bear market when the price drops.

Brief explanation of short selling on Alpaca Finance

Here is a brief representation of short selling when using leveraged yield farming on Alpaca Finance, with the ETH-BNB LP pool. In this case, you are betting that the price of BNB will fall against ETH:

  • You add 1 BNB in ​​principal to mine ETH-BNB on Alpaca Finance.
  • You choose 3x leverage. Thus, you borrow 2 BNB.
  • From the first two steps, you now have a total of 3 BNB in ​​assets. Alpaca Finance will convert 50% of your BNB acquisition into ETH to create a balanced ETH-BNB LP position.
  • Therefore, the protocol sells 1.5 BNB and converts it to ETH. You now have 1.5 BNB and 1.5 BNB of ETH, and your LP position is created in a ratio of 50:50.
  • When you close your position, you hold 1.5 BNB but you still owe 2 BNB to Alpaca Finance.
  • Alpaca Finance will take your 1.5 BNB and then post the remaining 0.5 BNB using your ETH balance to buy 0.5 BNB. (In total, you paid Alpaca Finance 1.5 BNB plus an amount of ETH worth 0.5 BNB.)
  • Now, if the price of BNB had fallen against ETH after converting your initial 1.5 BNB to ETH, it means that to cover your debt, you were able to buy back the 0.5 BNB at a lower price. Simply put, you sold high, bought low, and profited from the short position.
Source

In addition to the profit from the successful short, you need to consider the cost of borrowing funds from Alpaca (and other fees), but also income from LP farming (including interest and rewards of the platform). Currently, annual percentage rates of return (APY) on Alpaca pools range from 1% for stablecoin pairs to over 300%.

“Well, with Alpaca, when you borrow from us, not only do you not lose money on loan interest, but you gain in return! Why? Because you use the asset held for farming! Where the returns almost always far exceed the interest on borrowing! according to alpaca.

Making Profits Through Short Selling

Now that you understand how short selling works on Alpaca Finance’s leveraged farm, how can you use the strategy to make profits? Here is a simulation of creating a short position with a firm of stable assets, for example ETH-USDT.

You would create this short expecting the price of your borrowed ETH to fall during a bear market.

At the same time, the non-borrowed asset, USDT, will not be affected, regardless of the market condition. Here’s how it works:

  • Open an ETH-USDT farming position on Alpaca Finance and set the leverage to 3x.
  • Deposit your amount. For this illustration, we will use a deposit of 10,000 USDT. Why USDT? To reduce swap fees.
  • Since the leverage is set at 3x, you are borrowing $20,000 in ETH.
  • Now, since Alpaca Finance will balance the pool at a 50:50 ratio, $5,000 of your ETH debt will be exchanged for USDT. So you have $15,000 in ETH and $15,000 in USDT.
  • You have borrowed both $15,000 in ETH and $15,000 in USDT. However, since it is a stablecoin, there will be little to no price movement of the stablecoin.
  • The $5,000 traded from ETH to USDT to balance the LP position will create a net short position in ETH.
  • When closing your farming position, you will have to repay the debt. If $5,000 of ETH drops to $4,000, you would redeem the debt at $4,000 instead of $5,000 and make a profit of $1,000 before including the additional profits from yield farming.

At this point, buying back at a lower rate means you are paying less than you borrowed and profiting from the short position.

Although you can use a crypto-stablecoin farm, you can also use a crypto-to-crypto farm to bypass Alpaca Finance. However, using a crypto-stablecoin farm is safest in the event of a general bear market, as you do not risk a large loss due to nostalgia for your farmed stablecoin assets.

You can read our project overview on Alpaca Finance to learn more about the leveraged farming platform on BNB Chain.

Image
Source

Final Thoughts

Bypassing Alpaca Finance opens up new earning opportunities. The strategy works by depositing and selecting more than 2x leverage, allowing users to take out an oversized loan from the platform, which automatically balances assets to create a 50:50 LP position, resulting in a net short position on borrowed assets.

With this strategy, Alpaca allows users to short sell borrowed assets in the form of LPs, which can also produce net farming rewards.

What is Alpaca Finance:

Alpaca Finance is the largest lending protocol enabling leveraged farming on Binance Smart Chain. It helps lenders secure secure and stable returns and provides borrowers with under-secured loans for leveraged farming positions, greatly multiplying their farming principles and resulting profits.

Where to find Alpaca Finance:‍

Website | Twitter | Telegram | Discord | Medium | Git Hub |

Don’t forget to download the BSC News mobile app on iOS and android to keep up with all the latest BNB Channel and crypto news!

follow us on Twitter and instagram!

If you need tools and strategies regarding security and cryptographic education, be sure to check out the Tutorials, Cryptonomy Explainersand Trading Toolkits of BSC News.

Check Web3Wire Link Tree to track all relevant Web3 and Crypto!

Looking for a job in crypto? Check CryptoJobsNow!

Leave a Comment

Your email address will not be published.