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Hedging Strategy

For Lenders on Alpha Homora V2

A lender supplying 1 unit of an asset in the Earn section on Alpha Homora v2 for lending interests will have that asset’s long exposure. If he/she doesn’t want any long exposure, he/she could hedge against it by holding a Short Strike Token which will then get an equivalent amount of exposure to the opposite side. The token’s price ceiling will simply depend on the user’s target capital efficiency (while trading off with liquidation risks). For instance, when ETH price is at $4,000:
  • A user who lends 1 ETH in the Earn section on Alpha Homora v2 can hedge against his ETH long exposure by obtaining a Short ETH Strike token.
  • If he/she buys 6500-ETH for $2,500, he will get exposure to shorting 1 ETH and achieve 1.6x capital efficiency (=$4000/$2500).

For Borrowers on Alpha Homora V2

If a user opens a leverage yield farming position on Alpha Homora v2 by initially providing one asset then using the borrowed amount to swap to the another asset, the user will end up with long exposure to the swapped asset. If he/she doesn’t want any long exposure, he/she could hedge against it by holding a Short Strike Token.
For instance, when ETH price is at $4,000:
  • By supplying 4000 USDC and borrowing 4000 USDC to farm on ETH/USDC Trader Joe pool, the user will have ETH long exposure (assuming optimal swap swaps 4000 USDC to 1 ETH).
  • The user can hedge by holding 1 token of 6000-ETH which is worth only $2000 and achieve 2x capital efficiency).

For Normal Yield Farmers

If a yield farmer on other protocols such as Uniswap, Sushiswap, Pancakeswap, he/she can achieve neutral position by holding either Long or Short Strike Tokens that reflect their directional view of the asset.
For instance, when ETH price is at $4000 and you provide liquidity to ETH/USDT pool amount 1 ETH and 4000 USDT:
  • If you believe in the upside of ETH, you can hedge by holding 1 Short Strike Token.
  • If you believe in downside of ETH, you can hedge by holding 1 Long Strike Token
NOTE: Long/short exposure in LP tokens is variable and depends on the current price. To effectively have a neutral position, users may need to re-hedge every now and then.

Lending

For lenders on other protocols such as Aave, Beta, Compound and Cream, if they want to have a neutral position for collateral without unwinding the positions, they can hedge their Long exposure from lending out assets by holding Short Strike Tokens.
For instance, if you provide 10 ETH as collateral in Compound and borrow 20000 USDC, you can simply hedge 10 ETH exposure without closing the position by holding 10 tokens of 6000-ETH (or other Short Strike Tokens).

For Users Exiting From Unbonding/ Locking Period

If a user is in the middle of an unlocking/unbonding period of asset lock-staking in a protocol like Anchor (bETH), Maker (ETH to borrow DAI), but wants to exit and take the profit at the current price, the user can hedge against the short exposure by holding Short Strike Tokens.
For instance, a user has 10 unbounding ETH which will be taking 30 days to unlock. Within the next 30 days, ETH price could move in either direction affecting the total profit they will gain when selling at the end. If they want to take profit at the current price, they can hedge by holding 10 ETH Short Strike Tokens. The price ceiling (i.e. capital efficiency level) can be chosen to suit the user’s risk.