HOW TO AGAVE : LONGING AND SHORTING
📗 AGAVE 101
AGAVE is a lending protocol, built entirely by the 1Hive community and deployed on the Gnosis Chain (formerly xDai) where the fees are next to zero.
This neighborhood friendly lending protocol has a ongoing Medium article series called HOW to Agave, so if you didn’t read the first articles, we encourage you to take a quick look in order to get a glimpse of how to interact with the protocol:
How to Agave: Staking — Call Options — Contributing
Agave will always be owned by the AGAVE DAO members and holding $AGVE tokens gives you voting power to choose the future direction of the AGAVE DAO!
The purpose of this article is to take any person from zero to one in relation to longing and shorting using AGAVE.
💸CEFI vs DEFI
Although for many people these concepts may sound new, longing and shorting have been around for more than a century. Longing and shorting equities was a very popular activity associated with the stock market, the traditional finance sector also known as CEFI(centralized finance). Also a lot of centralized cryptocurrency exchanges users had the option to long or short their favorite cryptocurrencies/assets for a long time now.
Well, now you’re probably wondering how does this work in DEFI ?
Long story short(get the joke?) : a person takes long positions in assets that they expect will grow in value and short positions in projects they expect to decline in value. Since the creation of decentralized finance this has been one of the most popular and growth driving activities in the DEFI ecosystem.
Before goin into the nitty-gritty of longing and shorting we need to understand some key elements here:
- LTV (loan-to-value) : the ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
- APR (annual percentage rate) refers to the yearly interest generated by a sum that’s charged to borrowers or paid to investors.
- APY(annual percentage yield): it is similar to APR, except that it includes the compounding of interest.
- Liquidation Threshold (LT): Is the percentage at which the collateral value is counted towards the borrowing capacity.
- Health Factor (HF): The health factor measures the collateralization status of a position, defined as the ratio of the borrowing capacity over the outstanding debts.
The main question that should be on your mind when using DEFI protocols is : How do I leverage my money in order to make the most profit out of my long position? Well we have good news for you, AGAVE also allows you to get yield also on your stable coins.
In DEFI as in real life learning by example is more efficient so let’s start :)
Longing 📉
The concept of longing is easy in theory — one supplies a certain asset, borrows a different one and then uses the borrowed funds to obtain more of the supplied asset to achieve leverage. Doing this allows for greater profits if the market moves in the predicted direction.
AGAVE, allows you to supply WETH or WBTC and borrow xDAI or USDC stable coins in return. Then you can use your newly borrowed stable coins to obtain more WETH or WBTC for your position. This effectively creates a long WETH or WBTC position in which you would eventually have more WETH or WBTC to walk away with in case it went up in value.
We will focus on WETH in this step-by-step tutorial with the assumption that the price of 1 WETH is 1000$(at the writing of this article 1WETH is 3500$, but for simplicity let’s assume it’s 1000$).
If you supply an asset as a collateral, you assume that the asset will increase in value! For example if you supply 0.1 WETH with the price of 100$ (with a LTV of 70%) then you can borrow 70$ in stable coins.
Collateral means that if the WETH price goes down below 1000$ => the borrowed amount exceeds the deposit value and the LTV increases above the threshold (70% in this example) which results in the position being liquidated, so if you are not certain of the market direction do not borrow the full amount in order to not be liquidated.
A lot to take in, right? It’s better to understand all the risks and mechanisms involved and congratulations you made it until here!
Longing WETH in AGAVE can be done in four easy steps:
1.Buy WETH(you can get some on Honeyswap)
2. Deposit WETH in AGAVE. You need sign two transactions: one to approve your funds and the second to deposit them!
3. Borrow stable coins(xDAI in our case)
After you deposited WETH (0.1 WETH in this case) in AGAVE you will see the following Dashboard on the AGAVE website.
If you click on xDai you will see the Reserve Details page which contains all the details and factors related to your loan(LT, HF and more).
Now if you go to the Borrow page on the AGAVE website you will see the amounts that you can borrow(without taking the HF into account).
If you click one of the assets(xDAI in our case) you can see the actual amount that you can borrow with the HF factored in.
4. (Optional) Deposit the stable coins in AGAVE to get yield on them.
You also can also use the newly borrowed xDai to buy more AGAVE and stake it(like presented in the first article) or invest into other profitable projects.
Shorting 📈
AGAVE, allows you to supply xDAI or USDC and borrow WETH or WBTC in return. You can use your newly borrowed assets for shorting(fancy term for selling them and buying them back later at a better price) in order to buy them back at a later time and to obtain more WETH or WBTC for your position.
Let’s assume you deposit 1000 xDAI in AGAVE and you want to short WETH. This means that you borrow an X amount of WETH that you will sell(because you think the price of WETH will go down) for a stable coin or other asset that you think will increase in value, if you want to further profit from your short position.
At the end you will owe that X + interest to the lending protocol, but if you calculated your short position well then the WETH you pay back will be worth less than the WETH you borrowed from the protocol and you keep the profit.
Keep in mind that AGAVE offers much, much more than presented in this article, there are more ways than one to short or long using AGAVE. if you have any questions please reach out in the AGAVE Discord!
📚 HOW to AGAVE Series:
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