The Long and Short of Aurigami
DeFi money markets like Aurigami and AAVE have paved the way in democratizing lending and borrowing. The permissionless and trustless nature of DeFi lending protocols means you can easily lend idle assets to earn interests, or borrow capital for liquidity with just a few clicks — no third parties needed.
Capital that was previously attainable to only a select few based on tedious, esoteric processes in traditional finance, can now be accessed by anyone, anywhere in the world with an internet connection. And while it’s certainly useful to lend and borrow with such ease, DeFi money markets can help you unlock ALOT MORE in terms of investment strategies.
In this guide, we will showcase how you can long or short any assets using Aurigami.
What are Long and Short?
Okay, let’s get the basics out of the way first.
Investors enter a “long position” when they expect the value of a security or derivative to rise in value. Conversely, investors enter a “short position” when they expect the value to drop.
TL;DR of this is
Long: Price up = Good
Short: Price down = Good
Aurigami can allow users to create leveraged long or short positions through the actions of lending and borrowing. Doing so creates an amplified upside potential, and will allow users to generate greater profits when the market moves in their favor.
Why Decentralized Money Markets?
Leveraged strategies in traditional finance are often reserved only for the uber wealthy capable of funding margin trading accounts — individuals or institutional investors that financial institutions deem worthy of such facilities. With the advent of crypto, every investor can now have the option of deploying leverage as part of their investment strategy.
Centralized exchanges like Binance and FTX offer users the option to long and short various cryptocurrencies with ease. Just like the financial institutions we know, centralized exchanges act as custodians for your assets. You trust they have the ability to take care of your funds, that you will be able to access or withdraw them whenever you need to and well… we’ve seen how this played out in recent times.
The main advantage of using DeFi lending protocols is in its trustless nature — you never have to hand over your assets to a third-party entity. As the old adage goes, “not your key, not your coin” but of course, as with any other investment strategies, there will always be certain risks involved when it comes to leveraged trading.
So let’s see how this works in action on Aurigami.
How to Long Using Aurigami
Let’s say Adam wants to long ETH because he speculates that ETH price will rise as we move closer to the Merge.
Adam has only 1000 USDC, which he has already used to swap for 1 ETH at the price of $1000 on Trisolaris. But that’s not enough is it?
Adam is so confident that ETH will appreciate in price but alas, 1000 USDC was really all he had.
Here’s what Adam can do.
By depositing ETH on Aurigami, he will be able to borrow other assets such as USDT or USDC. Since the collateral factor of ETH is 70%, Adam can borrow up to $700 worth of assets using 1 ETH, which is worth $1,000 at the current price of $1,000.
To enter a leveraged long position, he will need to borrow a stablecoin like USDC/USDT, then immediately swap the borrowed assets for ETH.
Assuming Adam goes ahead and borrows $500 USDC, he will be able to use this to swap for an extra 0.5 ETH, which brings his total ETH holdings to 1 + 0.5 = 1.5 ETH.
If the price of ETH goes up to $1,500, Adam will be able to sell 1.5 ETH for $2,250. After paying back his debt of 500 USDC, he will still have $2,250–500 = $1,750.
Without using Aurigami, Adam’s initial investment of 1 ETH would only net him a total of $1,500.
Without using Aurigami
Initial investment = 1 ETH (purchased at $1,000) = $1,000
Revenue (sale of ETH at $1,500) = 1 x $1,500 = $1,500
Profit = Revenue — Initial investment = $1,500 — $1,000 = $500
Leveraged Long using Aurigami
Initial investment = 1 ETH (purchased at $1,000)
Debt = 500 USDC
Final holdings = 1.5 ETH (purchased at $1,000)
Revenue (sale of ETH at $1,500) = 1.5 x $1,500 = $2,250
Profit = Revenue — Debt — Initial investment = $2,250 — $500 — $1,000 = $750
As shown above, Adam has managed to enter a 150% leveraged long position (exposure to 1.5 ETH instead of just 1 ETH) with Aurigami, which in case nets him an additional $250, or 50% in profit.
But do note that for simplicity’s sake, this example DOES NOT take into account interests — that is the interest you earn from depositing ETH and the interest accrued from borrowing USDC.
How to Short Using Aurigami
Adam has a friend called Eve.
Eve holds a different sentiment towards the Merge from her friend. Instead of ETH price moving up, she predicts that it will go down since she reckons that the Merge is unlikely to be successful. In this case, how can she profit from this downward price movement using Aurigami? How can Eve short ETH?
Let’s start off with the same capital as the previous example — 1000 USDC.
Eve will need to first deposit 1000 USDC on Aurigami. Since the collateral factor of USDC is 80%, she can borrow up to $800 worth of assets using 1000 USDC.
To enter a short position on ETH, Eve will need to borrow ETH, then immediately sell it off for stablecoins (e.g. USDC).
Let’s assume that the current ETH price is $1,000 and Eve borrows 0.5 ETH (worth $500). She will be able to swap for 500 USDC immediately.
If the price of ETH goes down to $800, Eve will be able to buy back 0.5 ETH for only $400 and use it to repay the debt. The remaining 100 USDC left over will be her profit.
Short using Aurigami
Debt = 0.5 ETH
Sale of ETH = 500 USDC
Cost of ETH buyback = 400 USDC
Profit = Sale of ETH — Cost of ETH buyback = 500 USDC — 400 USDC = 100 USDC
Similar to the previous example, interests from lending and borrowing are not taken into account for simplicity’s sake.
How to Long + Short using Aurigami
Here’s another interesting strategy — you can enter both long AND short positions from depositing just a single type of asset. In essence, this is a combination of the two examples above.
Let’s see how Adam and Eve’s friend, John, does this.
John, like Eve, also speculates that ETH price will drop in the future due to an unsuccessful Merge. As a result, Ethereum users will look to other L1 ecosystems such as Near, which will mount a buy pressure on NEAR. So how can John act on this analysis using Aurigami?
Let’s start John off with the same capital as his friends — 1000 USDC, which he can then use to swap for 100 NEAR at a price of $10.
John will then need to deposit the 100 NEAR on Aurigami. Since the collateral factor of NEAR is 60%, Adam can borrow up to $600 worth of assets using 100 NEAR (worth $1,000).
To enter a short position on ETH and long position on NEAR simultaneously, John can borrow ETH, then immediately sell it off for NEAR.
Let’s assume that the current price of ETH is $1,000 and John borrows 0.5 ETH (worth $500). He will be able to swap for 50 NEAR immediately.
If the price of ETH goes down to $500 and NEAR price remains the same, John will be able to buy back ETH with only 25 NEAR to repay his debt. The excess 25 NEAR remaining after this will be his profit (same scenario as Eve’s).
If the price of NEAR goes up to $20 and ETH price remains the same, John will also be able to buy back ETH with only 25 NEAR to repay his debt. The excess 25 NEAR remaining after this will be his profit, on top of the profit from the sale of his NEAR deposit (same scenario as Adam’s).
The most ideal scenario for John would be for ETH price to drop and NEAR price to increase. Let’s see how this plays out.
If ETH drops to $500 and NEAR price appreciates to $20, John will only need to swap 12.5 NEAR for 0.5 ETH to repay his debts. His profit from this will be the sale of all his NEAR holdings, less the initial capital of $1,000.
ETH price down to $500, NEAR price remains at $10
Debt = 0.5 ETH
Sale of ETH = 50 NEAR
Cost of ETH buyback = 25 NEAR
Profit = Sale of ETH — Cost of ETH buyback = 50 NEAR — 25 NEAR = 25 NEAR = $250
ETH price remains the same, NEAR price up to $20
Initial investment = 100 NEAR (purchased at $10)
Debt = 0.5 ETH
Sale of ETH = 50 NEAR
Cost of ETH buyback = 25 NEAR
Total NEAR holdings = Initial investment + Leftover after ETH buyback = 100 NEAR + 25 NEAR = 125 NEAR
Profit = Sale of Total NEAR holdings — Initial Investment = (125 x $20) — $1,000 = $1,500
ETH price down to $500, NEAR price up to $20
Initial investment = 100 NEAR (purchased at $10)
Debt = 0.5 ETH
Sale of ETH = 50 NEAR
Cost of ETH buyback = 12.5 NEAR
Total NEAR holdings = Initial investment + Leftover after ETH buyback = 100 NEAR + 37.5 NEAR = 137.5 NEAR
Profit = Sale of Total NEAR holdings — Initial Investment = (137.5 x $20) — $1,000 = $1,750
With this approach, John can profit when ETH price drops OR when NEAR price rises, and his profit is amplified when both of his predictions come true. However, bear in mind that his exposure to two non-stable assets also means that John will be twice as exposed to price risks compared to Adam and Eve!
The permissionless and composability of DeFi money market help to unlock financial instruments that were otherwise unavailable for the masses. Lending, borrowing, leveraged long and short are just some of the basic investment strategies that one can deploy using Aurigami. With the introduction of new features such as fixed yield and Innovation Zone in the future, users will have access to even more advanced tools.
Until then, stay safe and WAGMI everyone!
