The Big Short—PembRock Style
PembRock was launched in the NEAR ecosystem to give DEXes expanded capabilities and allow everyday users to take advantage of the benefits of leveraged yield farming within an easy-to-use platform.
One of the best things about using PembRock is that you can profit in any market, employing strategies to make gains regardless of whether a token is going up or down. Especially with the volatile market we find ourselves in, the ability to use PembRock Finance to short a token is a big advantage, and we’ll show you how to do it!
Keep reading to see how.
Longing is the conventional way to invest in an asset, and involves purchasing a cryptocurrency in the expectation that the price will rise. It is then sold at a pre-defined price or when the investor is happy with their profit.
Example: You buy 1 Ethereum at $2000, selling when the price hits $2400, making a $400 profit.
Shorting is done when a person believes that the price of an asset will go down. It is mostly the practice of more experienced investors, as the practice involves borrowing, payment deadlines, and commissions. In simple terms, opening a short position involves borrowing a certain number of tokens, selling them at the current market price, and then buying them back at a later date once the price has dropped. These tokens are then returned, with the price difference kept by the investor (minus the borrowing fee).
Example: You open a position on an exchange where you borrow 2 Ethereum (with 1 Ethereum as collateral) for $2000 each. These are sold at the market price for $4000. Once the price drops to $1600, you decide to repay your loan, buying back the 2 Ethereum for a total of $3200. This nets you a profit of $800, minus the borrowing and handling costs.
Bigger exchanges with a lot of liquidity such as Binance offer margin trading, as do certain DEXes such as dYdX. On these platforms, you can easily borrow assets to short cryptocurrencies like in the example described above.
While the platforms described above allow you to borrow for the purposes of shorting a cryptocurrency, you can’t earn while you wait. It may take a month or more for a cryptocurrency to fall to your desired level, and all that time you will be paying borrowing fees.
But what if the borrowing fees are 0%? Well, when this is the case, it is often because funds are secured by overcollateralization—where a collateral amount larger than the cost of the loan is put up. With these funds locked up, there is what is referred to as an opportunity cost.
PembRock Finance is different, as you have the ability to short a cryptocurrency while profiting from farming APY in the process. We also offer undercollateralized loans, where you can borrow 3x the amount of crypto that you put up, boosting your rewards.
We’ll give you a step-by-step look into how this works.
It’s important to note that creating a short position with PembRock is only possible when leveraging funds by 2-3x.
For the purposes of this example we will use the PEM-USN pair — USN being NEAR’s algorithmic stablecoin pegged to the US dollar, and PEM being PembRock’s native token — which currently offers 285% APY with 3x leverage.
Imagine the market is facing a correction and you believe PEM will go down. This is where opening a short position will come into play.
- 1.Go to PembRock Finance and open a PEM-USN position, borrowing PEM with leverage.
- 2.Let’s say PEM is $0.10 and you choose to farm 60,000 tokens, roughly corresponding to 6,000 USN. In sum, your position will come to US$12,000 — the 50/50 ratio of 60,000 PEM and 6,000 USN required within the liquidity pool contract.
- 3.By putting up 4000 USN and leveraging 3x to borrow PEM, you will get 80,000 tokens ($8000). 20,000 of these PEM tokens will be converted to 2000 USN, giving you your total of 6000 USN and 60,000 PEM tokens.
Remember, you have to return the coin you’ve borrowed, so you are banking on the fact that USN will outperform PEM; that is, PEM will drop.
Let’s examine three scenarios:
- Both coins stay the same - even though you are hoping to profit on a drop in the value of PEM, you still profit through farming yields. After just two weeks your yield farming returns will increase your position value to $12,548.93 (minus borrowing fees).
- PEM drops to $0.08 - PEM drops to $0.08 - If you choose to close your position now, you will be required to pay back 80,000 tokens at $0.08, meaning you now pay back $6400. You borrowed $8000, so $1600 is kept as profit, plus the yield farming returns which are compounded daily.
- PEM sharply increases - A sharp increase can put you in a loss-making position, as farming gains are outstripped by the fact that you need to pay back 80,000 PEM at an increased value.
So there you have it — that’s how you can profit from the fall of a cryptocurrency you are farming!
Please note that leveraged yield farming offers you a great chance to receive high APY, but there is also the risk of liquidation, where your debt increases to a point where it is not able to be covered by your collateral, necessitating the automatic closure of your position. When shorting, a token dump won’t result in liquidation, but it can in other situations, meaning it’s always good practice to monitor your position.