Short Farming – the ultimate strategy for a mild downtrend era

What is Shorting?

When you’ve got strong conviction a specific asset will go down, instead of buy & hold this asset (= long) you want to do something opposite, to earn from its rate decline – this is short.

There are some ways to short an asset, typically most of them have the common basis of selling the asset now and then somewhen buy the asset again in a cheaper price.

The most common way to short is by borrowing the asset, then selling it immediately, and when price goes down – buy it again (at a cheaper price) and return the loan.

Classic Short

What is Short Farming?

Short Farming is similar to the classic short operation, just instead of selling immediately all the asset you’ve just borrowed – sell half of it to stablecoin, and farm the asset agains stablecoin till the asset price will go down.

When asset price went down enough to close the short position – rewind everything back by breaking the liquidity pair into the asset and stablecoin, and return the loan – half of it you already hold since you sold only half of it (except from impermanent loss during the farming period), and half of it buy again with the stablecoins to return the loan.

Example: suppose you think token XXX will go down. Borrow token XXX, let’s say 100 units of it. Then sell 50 units of it to USDC. Now farm XXX-USDC pair. When XXX price will go down enough, break XXX-USDC to ±50 XXX and USDC, buy enough XXX so you’ll have again 100 XXX (might need to buy less or more 50 XXX, depends on amount of XXX you have now after pool rebalanced during the farming period), and return the XXX to where you borrowed it from, in order to release your collateral.

Supply USDT and borrow NETT from Agora (Metis)
Swap half of the borrowed NETT to USDT, and farm NETT-USDT in Netswap till NETT price will go down.

Risk of classic shorting

The major risk of shorting is price going up, so you’ll have to return more than you’ve borrowed in USD terms. Usually you place collateral against the loan; when a certain threshold of the loan/collateral percentage is met, you’ll get liquidated – some of the collateral will be paid to return the loan automatically.

In order to beware from liquidation, it’s better to borrow not more than 25% of the collateral for highly variable assets, and not more than 50% for more solid assets, and not for a long time, in order to minimize risks of temporary spikes.

How Short Farming reduce this risk?

There are typically three main scenarios to watch –

  1. Price going down as expected – on this case, classic short will function better, cause you sold all of your asset in high price and bough it in cheaper price, while in short farming you did it for half the asset tokens only.
  2. Price going up – on this case, short farming will minimize the damage cause your impact will be approximately half comparing to classic short, since again you still hold half of it.
  3. Price going sideways – on this interesting case, classic short will break even, almost. However short farming will yield profits due to the farming you’ve done with half of the borrowed asset.

So overall short farming is better when you assume an asset will go in downtrend (and not immediate sharp decline), and you don’t have strong conviction of it.

Tip: don’t short the strong tokens. Preferably find a token that should go down even in a bull market scenario; there are many trash tokens, however it’s hard to find one that also can be borrowed and farmed as well.

Short Farming calculator – The Calculator Guy

Categorized as DeFi

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