Hedging with EVAA (Lending)
Last updated
TONCO Docs EN
Last updated
Entering unprotected LP positions, especially within a narrow range, can be high-risk. While APR on TONCO can be as high as 3-digits on TON/USDT pair, the impermanent loss can eat into your profits.
It may be a good idea to hedge the position in order to protect your investment.
A hedged LP position involves using additional funds as collateral to borrow the volatile asset like TON, using the EVAA Finance protocol (hedging the downside risk on price decrease).
You have $15,000 and want to open a position in the TON/USDT pair on TONCO DEX. Assuming the APR for a TON/USDT pair is 100% and the Toncoin is traded at 5 USDT.
You put 1500 TON and 7,500 USDC into a liquidity pool on TONCO DEX. Let's say you put range between 4.5 and 5.5. As long as the TON price stays within your designated range, you’ll earn trading fees.
One day, the price of TON drops beyond your range to 4 USDT. You end up with a position consisting of ≈ 3,060 TON (as the ratio changes along the way, you end up with slightly more than 2x TON) and 0 USDT. You are now fully exposed to the TON price and experience permanent loss.
After selling the tokens received for providing liquidity for 30 days while being in-range, the cumulative yield stands at 1,232 USDT (calculated as 7,500 * 2 * 100% / 365 * 30). You decide to stop providing liquidity.
If you sell the 3,060 TON at 4 USDT each and combine the proceeds with the 1,232 USDT, you’ll see a total loss of 1,528 USDT ((3,060 * 4 + 1,232) - 7,500 * 2) due to impermanent loss.
As you can see, despite a three-digit APR on TON/USDT, you can still incur a net loss
If you had opened the original position without any hedging ($15,000: 7,500 USDT + 1,500 TON), you would have ≈3,060 TON and 0 USDT. If you decide to lock in your loss and withdraw 3,060 TON, you would receive:
— 3,060 * 4 = $12,240 (if the price of TON dropped to $4) — Trading fees ($1,232 from the example above)
The total would be:
$12,240 + $1,232 = $13,530, a -10.18% loss
In the hedged scenario, you supply 10,000 USDT to borrow the volatile asset (1,500 TON) from EVAA. After the TON price drops, you withdraw ≈ 2,040 TON. You sell 540 TON for $2,160 and repay the 1,500 TON borrowed from EVAA. You also retrieve your $10,000 collateral from EVAA and have an additional $2,500 from the initial TON-USDT trade at $5.
The total would be:
— $2,160 (from the sale of 540 TON at $4)
— $2,500 (from the remaining TON traded at $5)
— $10,000 (collateral returned)
This gives you:
$2,160 + $2,500 + $10,000 = $14,660, plus:
— Trading fees ($1,232 from the example above)
— EVAA net APR (+6.92%, which equals $58)
The total would be:
$14,660 + $1,232 + $58 = $15,950, a +6.4% profit
This means that by hedging, you have completely mitigated the loss from the drop in the TON price and made a profit from the position.
Here’s a step-by-step strategy for hedging the downside risk of a TON price decrease.
There is a symmetrical strategy that aims to protect the gains in case the asset price goes up. Instead of borrowing TON, you’d either buy it and borrow USDT against it.
Start by supplying $10,000 worth of USDT to EVAA. As of December 18th, you’ll earn an APR of over 9.4% on USDT.
Pledge your $10,000 USDT as collateral to borrow 1,500 TON (assuming the price of 1 TON = 5 USDT). You will pay a borrowing APR of around 2.4% on TON. Your net APR on EVAA will be ≈ +6.9% (as of December 18th).
You now have your initial $5,000 in USDT plus the 1,500 TON borrowed from EVAA.
Open an LP position with 5,000 USDT and 1,000 TON (worth $5,000). This brings your total position value to $10,000. After opening the position, you can sell the remaining 500 TON you borrowed, converting it into 2,500 USDT.
The main disadvantage of this hedging strategy is that it is capital-intensive. You need enough funds to supply on EVAA to make it viable
