Not All Lending Protocols are the Same (part 1)

Hey Crofam,

The crypto markets, especially DeFi, have been rough for all of us these past months, and I hope all of you are doing okay.

We see that the protocols and their tokens on Cronos Chain have followed the crypto downtrend and have taken a beating. It is common for investors to move their money from more volatile assets ($MMF, $DARK, $VVS) to less volatile assets ($BTC, $ETH, stable coins) during these times. Unfortunately, we noticed that a lot of the Cronos community blame “shorting” for token value depreciation.

In this three-part series, we will explain:

1: What is short selling or “shorting”?
2: How investors were using other lending protocols to “short”.
3: How Evolve is different from other lending protocols and discourages investors from “shorting”.

What is Short Selling or “Shorting”?

• Short selling occurs when an investor borrows a token and sells it on the open market, planning to buy it back later for less money.
• Short-sellers bet on, and profit from, a drop in a token’s price.
• Short selling has a high risk/reward ratio: It can offer big profits, but losses can mount quickly and infinitely due to margin calls.

Example of “Shorting” to Make a Profit

Imagine a trader who believes that $XYZ token — currently trading at $50 — will decline in price in the near future. They borrow 100 tokens and sell them to another investor. The trader is now “short” 100 tokens since they sold something that they did not own but had borrowed. The short sale was made possible by borrowing the $XYZ tokens from lending protocols such as Annex Finance, Mimas Finance, and Tectonic by depositing less volatile assets (stables, $BTC, $ETH) and using them as collateral.

A week later, the protocol whose $XYZ tokens were shorted have bad news , and the token falls to $40. The trader decides to close the short position and buys 100 shares for $40 on the open market to replace the borrowed shares.

Profit: $1,000 ($50 — $40 = $10 x 100 $XYZ tokens= $1,000).

Example of Short Selling for a Loss

Using the scenario above, let’s now suppose the trader did not close out the short position at $40 but decided to leave it open to capitalize on a further price decline. However, they have some great news and the price soars to $65 per token. The trader decides to close the short position at $65.

Loss: $1,500 ($50 — $65 = negative $15 x 100 shares = $1,500 loss). Here, the trader had to buy back the shares at a significantly higher price to cover their position.

In the next parts of this series, we will describe how investors were able to use other lending protocols to “short” and how Evolve is different and discourages investors from “shorting”.

Follow Evolve

Twitter: https://twitter.com/evolutionxeco
Discord Group: https://discord.gg/JY2MseKck3
Medium: https://medium.com/@evolutionecosystem
Gitbook: https://docs.evl.finance/