Borrow to Short
Last updated
Last updated
Shorting is a trading position where you believe the price of an asset will decrease. In order to profit from a shorting position, you borrow the asset from a lending market, sell it immediately, and buy it back after the price has decreased. The result of shorting the asset is that you repay the borrowed amount and profit the difference between selling and repurchase prices.
The profit you make depends on:
The loan interest you incur while waiting for the token asset to drop in value
The price of the token asset at the time you decide to repurchase it to repay the loan
Shorting is an advanced trading strategy that requires knowledge of lending and trading markets. We recommend that traders be aware of the risks of lending markets and trading markets before attempting this.
In order to short, you need:
Collateral: the token asset you use as collateral in order to open a borrow position on the lending platform
Short Asset: the token asset you believe will decrease in value that you wish to short
Lending Platform: the protocol where you will deposit the Collateral and borrow the Short Asset
Liquidity Market(s): the protocols where you will sell your Short Asset and repurchase it after the price has declined to repay your loan
To understand the borrowing process, we recommend you review the walkthroughs on depositing and borrowing.
For this example, we will pretend you want to use USDC as collateral and short ETH, acting on a belief that ETH will decrease in value.
1. Deposit USDC
Open the USDC-ETH Silo and deposit USDC.
2. Borrow ETH
Using USDC as collateral, borrow ETH.
3. Sell ETH for USDC
Sell ETH for USDC on a decentralized exchange (DEX) such as Uniswap or a centralized exchange (CEX) such as Binance.
4. Repurchase ETH using USDC
Once the price of ETH decreases, use your USDC to repurchase ETH.
5. Repay your ETH loan
Repay your ETH loan in the USDC-ETH Silo.
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You make a profit if the price of ETH is lower when you repurchase compared to when you sold, factoring in the interest rate you paid for the duration of your ETH loan.
The above scenario assumes that your short position is successful and the value of ETH decreases relative to your sale price. Unfortunately, this is not always the case and there are a few risks involved with this strategy.
Closing your short: If the value of ETH actually increases after you sell it, you may be required to repurchase the ETH at a higher price in order to close your short.
Liquidation: If the value of ETH increases substantially, causing your Health Factor to exceed 1, your USDC collateral may be liquidated, costing you a hefty liquidation fee.
Borrowing Cost: Since you are borrowing ETH, you will be required to pay a borrowing interest rate. This amount is added to the value of your loan and can push your Health Factor to the liquidation threshold.
