Explaining TrustPredict Phase 2: MARGIN — Digital Asset Leveraging & Hedging
repost of an article published in Medium:
https://medium.com/openpredict/introducing-trustpredict-phase-2-margin-digital-asset-leveraging-hedging-62bf3aa80d7d
TrustPredict is an easy to use dApp which enables anyone to engage in making speculations and turning them into liquid assets via the OpenPredict protocol. As our platform expands, TrustPredict will develop its feature set and capabilities, and enable more complex trading activities.
Version 1 of our app, called TrustPredict SPOT, enables any two pre-established counterparties to come together and mint assets that hold two opposing positions on any speculation. One party must take a long position while the other takes a short position.
The second version of the app, TrustPredict MARGIN, expands upon the basic features of TrustPredict SPOT and facilitates margin trading by plugging into leading DeFi lending protocols. This opens up a range of new opportunities for traders as it is no longer necessary for them to deploy all of their funds when entering into trades.
In addition, this allows anyone to put their favorite digital assets to work by using them as collateral for a trade, and use a stablecoin in order to complete a P2P trade on TrustPredict.
With TrustPredict MARGIN, users can:
Engage in trading without having to liquidate their funds and exit their long term positions. Anyone can leverage their portfolio in a streamlined way by omitting the need to use multiple protocols in order to achieve the same results manually.
Mint tokens on a vast range of speculations in the form of liquid assets (synths) that are unavailable on CEXs and DEXs.
Perform complex trading activities including powerful hedging techniques which enable them to maintain exposure to the core assets in their portfolios, while simultaneously protecting the value locked in their portfolios by taking hedge positions against extreme market volatility and/or black swan events.
How does it work?
Two counterparties come together to speculate on the price of Ethereum on December 31, 2020.
Both parties take opposing positions related to the price of ETH, and deposit collateral for their positions with the funds being held in the escrow smart contract.
The first counterparty (Trader A) has a portfolio made up of 50% ETH, 20% LINK, and 30% UNI. He can choose to deposit his ETH and LINK on Aave or Compound as the two platforms support both currencies, and use his deposit as collateral to borrow a stablecoin that will be used to enter his position.
The protocol does all the heavy lifting; generate the transaction for depositing collateral, and borrow the stablecoin that is available at the best fixed rate. This allows Trader A to seamlessly move from depositing funds for collateral to entering into his ETH price trade.
In the event of a successful outcome relating to the price of Ethereum, then Trader A will have his rewards automatically distributed by the escrow contract once the price of ETH on the date in question has been confirmed. At this point, he can choose to return to Aave or Compound to end his loan and retrieve his ETH or LINK deposits.
By leveraging the modularization of DeFi money legos, even in the event of a losing position, his deposits on Aave or Compound remain unaffected. They can be redeemed at any time by simply depositing the required amount of stablecoins.
Hedging against extreme market movement
Despite the emergence of a large number of new cryptocurrencies, the market is still heavily correlated to Bitcoin with the vast majority of coins following Bitcoin’s lead. This is compounded by the fact that drops in the price of altcoins are often multiples of decreases in the price of Bitcoin. A 25% drop in Bitcoin price could lead to a 50% or more drop in the price of various altcoins.
While trader A may be happy with his portfolio mix of 50% ETH, 20% LINK, and 30% UNI, it consists of only altcoins and is heavily exposed to the Ethereum ecosystem.
TrustPredict MARGIN enables him to use a portion of the portfolio as collateral, and borrow stablecoins to enter into a position on a steep drop in the price of Bitcoin. Similar to the example above, he deposits the 50% ETH part of his portfolio as collateral for a stablecoin loan on Aave or Compound. This loan is then used to place a position on a steep drop in the price of Bitcoin, meaning that he receives a payout in the event that the price of BTC drops significantly.
Assuming BTC price falls by 25%, while the value of his core portfolio may also drop in unison with Bitcoin, his position on TrustPredict MARGIN protects him from severe losses, by allowing him to “win” as he correctly predicted the price fall.
These forms of hedging are widespread in traditional finance, and OpenPredict is bringing them to crypto. Our platform continues to open new avenues for traders and enable an almost limitless range of speculation, digital asset creation, and P2P trading.
At launch, TrustPredict MARGIN will support Aave and Compound, and allow users to deposit funds onto the two popular protocols in order to receive stablecoins that can be used to conduct a range of speculative, P2P trades. Once the successful integration of these two lending protocols has been established, then additional platforms such as Cream Finance will be considered in the future.
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