Advanced Money Market Strategies

This section provides an overview of how individuals can leverage a lending network to their benefit. However, it is essential to read the sections on Lending, Borrowing, and most importantly Liquidations first to grasp the potential risks involved.

Going short a token

Shorting a token refers to the act of betting against it, with the aim of profiting from a decrease in its value.

For instance, to short ETH, an investor can deposit USDC as collateral and borrow ETH against it. Assume the investor borrows 5 ETH and sells them for USDC. If the price of ETH falls, the investor can buy back the 5 ETH for less USDC, close the borrow position, and earn the difference as profit.

Going leveraged long a token

Leverage involves using borrowed funds to increase the amount of an asset held in order to potentially amplify returns, but also increase the risk of losses.

For instance, to leverage a long position in ETH, one can deposit ETH as collateral and borrow USDC against it. The borrowed USDC can then be used to purchase more ETH. If the price of ETH rises, a portion of the additional ETH purchased can be sold to repay the USDC loan, resulting in a profit.

Looping

After opening a leveraged long or short position, it's possible to increase the exposure to the position by looping the leverage.

For instance, a user who has created a short position against ETH would supply USDC, borrow ETH against it, and then sell the ETH. To enter a leverage cycle, they would use the USDC generated from the ETH sale as additional collateral to borrow even more ETH and repeat the process as many times as they wish. However, there is a limit to the number of cycles that can be performed, as each deposit of collateral permits a smaller borrowing position.