The financial instrument of swaps is one of the most widely used in the traditional finance world and MetalSwap, with its Hedging Contracts, is the only decentralized application offering this instrument within the blockchain ecosystem.
Today, we continue to explore the fundamental mechanics of the protocol and are ready to address any doubts about the question, "What is a short position on MetalSwap?"
MetalSwap is undoubtedly one of the most complex dApps to grasp, owing to its pioneering role in the world of DeFi's Hedging Contracts. The team is dedicated to explaining the basic workings of this protocol in the simplest manner possible. The Unveil MetalSwap series has already covered crucial topics like Hedging Contracts, Fronted in DeFi and what is a long position on MetalSwap.
In this fourth episode, we delve into the topic of short positions, with the aim of explaining how this type of position functions and its purpose within MetalSwap.
Short position on MetalSwap
Let's jump right into a practical example to introduce you to the subject. Suppose a user has purchased 1 ETH because he will need it to mint an NFT collection in a week. However, he is concerned that the price might drop over the next 7 days, reducing his purchasing power. For this reason, the user might open a short position within MetalSwap, selecting 1 ETH as the target size, effectively neutralizing the volatility over the next seven days.
If the price of ETH does indeed decrease, MetalSwap will reimburse the user; if the price goes up, the user will lose some of the cover but will benefit from the higher asset price that he holds. In both scenarios, volatility will have been eliminated.
RiskOff Hedging Contracts with MetalSwap dApp
Now, let's delve deeper and understand how a short position works in practice:
- To open a short position on MetalSwap, you'll need to use the underlying asset as the target size and cover (in this example, ETH). Using 100% of the cover relative to the target size is primarily for insurance purposes; using less cover than the target size opens a leveraged position.
- The position is considered short when the price range indicates a potential price decrease for the volatile asset. This is represented by the white section on the Optimism network or the green section on the Ethereum network.
- When you choose to hedge a short position, the hedging swaps will pay you the profit in stablecoins; USDC if you're on the Optimism Blockchain, USDT if you're on the Ethereum blockchain.
- The premium for a short position must be paid in the underlying asset.
- The liquidity reward is always in XMT, regardless of whether it's a long or short position.
Real Use Cases of a short position on MetalSwap
The potential use cases for this financial instrument are vast, and the examples provided here are not exhaustive but serve to illustrate the tool's possibilities. The team is constantly exploring new use cases, regularly sharing them in the blog.
- As we've seen, a short position can be opened to hedge against future price declines, effectively using MetalSwap as insurance. Of course, tools like MetalSwap are also employed for market speculation, and thanks to our hedging contracts, you can do so with leverage of up to x10.
- Many of the use cases published in the blog depict scenarios where a DeFi user safeguards their future profits by participating in farming operations within various dApps.
- The crypto market is highly volatile due to continuous news. Opening short positions on assets that we are accumulating out of concern that news might cause their prices to drop is a compelling use case.
- Miners do not always sell all the revenue of their activity, a short position can protect them against the price volatility.
As mentioned, these are just some examples where MetalSwap's hedging contracts, particularly in their short form, can be advantageous for DeFi users and beyond. If you've discovered other interesting use cases, please share them in the official forum so that we can pass them on to the entire Swappers community.
-The DeFi Foundation
✎ What is MetalSwap?
MetalSwap is a decentralized platform that brings Hedging Contracts on financial markets with the aim of providing coverage to those who work with Digital Asset and an investment opportunity for those who contribute to increase the shared liquidity of the project. Allowing the protection for an increasing number of operators.
With MetalSwap we enable Hedging Contracts on the DeFi field, AMM style.
RISKOFF HEDGING CONTRACTS with MetalSwap dApp!