Background
Anchor on Terra gives fixed ±19.5% APY.
Mirror on Terra lets you trade popular US stock market assets. It’s not directly those stocks/securities, but crypto tokens backed by those assets, usually costs higher than market value of those shares.
Mirror also have the option to short those assets, and also farm the assets – 50% the stock and 50% UST.
It’s started getting more interesting when Mirror opened the option to borrow against aUST as collateral – the ‘receipt’ of investing in Anchor.
In addition to which, Mirror gives rewards in MIR token for shorting and farming mAssets, 20%-50% APY.
What is ‘Short, Long Buy Neutral’?
Bottom line – it’s the strategy of investing in same asset, and same amount, at the same time, short and long.
Usually, in traditional finance system, there’s no point of doing it. You’ll get break even either case, whether the stock will go high or low since you invested in both directions.
In here, it gives you indeed no earnings from stock going higher or lower from initial investment phase, however you’ll receive rewards for three parts – shorting the asset, farming the asset, and the collateral (aUST) keeps getting Anchor interest.
Show me the money! (how much will I get from it?)
Overall Average APR = (Short Farm APR x 1⁄3) + (Long Farm APR x 2⁄3) + (Anchor APR x 2⁄3)
According to the time of writing (2021-11-24), mSQ has historical short APR of 34.64% and long APR of 31.46%, thus overall average APR for mSQ is 45.52%.
Since the UST from short selling is locked for two weeks (see step #6 below in ‘how to’), and we use it to long form later on, the overall average APR will start to take effect only two weeks from beginning, assuming you’ll complete the last step (see ‘how to’ section below).
The APR for first two weeks should be: (Short Farm APR x 1⁄3) + (Anchor APR x 2⁄3)
In the mSQ example below, it’s 24.54% for first two weeks – before Long Farm step will be triggered.
Historical Long APR, Historical Short APR.
Risks & hidden costs
- The inherent usual smart contract & DeFi risks.
- Liquidation of short asset by stock price going high above threshold of borrowed UST against it.
- Impermanent loss of long farm.
- 1.5% fee from short selling value will be deducted (two weeks after short been triggered by you).
Alright damn it I’m in! (how to)
- Prepare UST amount in Terra wallet you would like to invest.
- Invest 2/3 of this amount in Anchor – we’ll use the aUST you’ll get in return as collateral for borrowing, while it will still keep getting ±19.5% APY.
- Decide which mAsset you would like to invest in. It should be one of the popular ones so Mirror won’t delist it, and one that has maximum average APR of long & short. You can find 30 days historical average APR in here, I used mSQ.
- Short the asset in here, select all the aUST as collateral and leave the collateral ration in 200% if you don’t know how to tune the risk properly (liquidation will start at 150%), it means you gonna borrow half of the collateral value in mAsset, thus with third of your whole amount from step #1.
- Buy the same mAsset in Trade section with your left UST – third from the initial amount, thus you have short and long with same amount, 1/3. In order to close the short position – return back the borrowed mAsset from step #4, you’ll use the ‘Long’ mAsset from this step, both with same amount of mAsset so you won’t have to pay anything in UST terms when you withdraw.
- Two weeks after – 1/3 of the amount is unlocked (the borrowed USTs against short selling mAsset in step #4), minus 1.5% fee from it. Long Farm the mAsset now, with those USTs and mAsset from step #5. You might have to add more USTs or left with some USTs since the third mAsset value from step #5 might have changed due to price difference from two weeks ago, and of course the 1.5% fee.
- There’s no 7th step. You made it bro. 😉
Reference
https://mirrortracker.info/strategies/short-long-buy-neutral