Hedging with EVAA (Lending)
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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 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 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.
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.
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.
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.
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 , you’ll earn trading fees.
