Alpaca Finance allows users to sell positions in agriculture and make potential profits, even during a market downturn.
Short sale on Alpaca Finance
Alpaca Finance provides users with numerous techniques to generate income in the Decentralized Finance (Defi) space. The Leveraged Yield Farming platform on BNB Chain allows users to create strategies to adjust the exposure of their assets and generate profits. Some of these strategies include “longing” and “shorting”.
Longing is a common technique for traders to make profits by holding assets that are increasing in price over time. Users employing this strategy can also incur losses when the assets fall in price.
Shorting, on the other hand, is the act of selling assets upfront to make a profit when the price falls.
Shorting Alpaca can be very lucrative, unlike most derivatives exchanges where users lose their money if their short positions don’t turn a profit every time the asset price doesn’t fall.
The difference is: Alpaca allows users to farm and short the market at the same time.
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Alpaca Finance allows users to short borrowed assets. This can be done in just a few steps by depositing your desired amount into the particular farm and setting leverage in excess of 2x – meaning you are borrowing more than the amount of money you put down as collateral. This action ensures that Alpaca Finance will lend you enough funds to establish a net short position and make a profit if the price of the loaned asset falls.
In summary, farming with leverage greater than 2x automatically creates a short position on the borrowed asset, which can yield profits in a bear market if the price falls.
Brief explanation of short selling at Alpaca Finance
Here is a brief representation of short selling using leveraged yield farming on Alpaca Finance with ETH-BNB LP pool. In this case, you are betting that BNB will fall in price compared to ETH:
- You basically add 1 BNB to farm ETH BNB on Alpaca Finance.
- You choose 3x leverage. So you borrow 2 BNB.
- From the first two steps you now have a total of 3 BNB in stock. 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 into ETH. You now have 1.5 BNB and 1.5 BNB worth of ETH and your LP position is created at a 50:50 ratio.
- When you close your position, you hold 1.5 BNB, but you still owe Alpaca Finance 2 BNB.
- Alpaca Finance takes your 1.5 BNB and then accounts for the rest of 0.5 BNB by 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.)
- If the BNB price went down compared to ETH after converting your initial 1.5 BNB to ETH, it means you were able to buy back the 0.5 BNB at a lower price to cover your debt. Simply put, you sold high, bought low, and profited from the short selling.
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In addition to profit from the successful short, you need to factor in the cost of borrowing funds from Alpaca (and other fees), but also the income from LP farming (including interest and platform rewards). Currently, annual percentage returns (APY) for alpaca pools range from 1% for stablecoin pairs to more than 300%.
“Well, with Alpaca, when you borrow from us, not only are you not losing money on lending rates, you’re gaining returns! Why? Because you use the assets held for farming! Where returns almost always far exceed lending rates!” to Alpaka.
Make profits from short sales
Now that you understand how shorting 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 an asset stablecoin farm, e.g. B. ETH-USDT.
You would create this short with the expectation that the price of your borrowed ETH will fall during a bear market.
At the same time, the non-borrowed asset USDT remains unaffected regardless of market conditions. Thats 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 leverage is fixed at 3x, borrow $20,000 in ETH.
- Since Alpaca Finance will now balance the pool 50:50, $5,000 of your ETH debt will be swapped into USDT. So you have $15,000 in ETH and $15,000 in USDT.
- You borrowed both $15,000 in ETH and $15,000 in USDT. However, since it is a stablecoin, there will be little or no price movement on the stablecoin.
- The $5,000 swapped from ETH to USDT to balance the LP position will create a net short ETH position.
- If you close your farming position, you must repay the debt. If ETH falls from $5,000 to $4,000, you buy back the debt at $4,000 instead of $5,000 and make a $1,000 profit before factoring in the additional profit from yield farming.
At this point, buying it back at a lower interest rate means you’re paying less than you borrowed, and you’ve benefited from the short sale.
While you can use a crypto stablecoin farm, you can also use a crypto-crypto farm to short on Alpaca Finance. However, using a crypto stablecoin farm is safest in the event of a general bear market as you don’t risk a significant loss from longing for your farmed stablecoin fortune.
You can read our Alpaca Finance project insight to learn more about the leveraged yield farming platform on BNB Chain.
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Final Thoughts
Shorting on Alpaca Finance opens up new earning opportunities. The strategy works by depositing and selecting leverage above 2x, allowing users to take an over-collateralized loan from the platform that automatically balances the assets to create a 50:50 LP position, resulting in a net short position on the borrowed assets.
Using this strategy, Alpaca allows users to shorten borrowed assets in the form of LP, which can also result in net farming rewards.
What is Alpaca Finance:
Alpaca Finance is the largest lending protocol enabling leveraged yield farming on Binance Smart Chain. It helps lenders generate safe and stable returns and provides borrowers with undercollateralised loans for leveraged yield farming positions, greatly multiplying their farming principles and the profits derived from them.
Where to find Alpaca Finance:
Website | Twitter | Telegram | discord | Medium | GitHub |
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