Hedging with Tradoor (Perpetual futures)
Learn more how you can hedge your LP position on TONCO to protect your investment
Last updated
Learn more how you can hedge your LP position on TONCO to protect your investment
Last updated
An alternative way to hedge the downside risk of price decrease on your LP position using lending platforms is to short the volatile asset via decentralized perpetual futures on Tradoor, which allows leverage up to x100.
Perpetuals are crypto derivative contracts that let traders buy or sell assets without an expiration date
This method is less capital-intensive compared to using lending, as DeFi lending requires overcollateralized loans. With short-selling on Tradoor, you can use margin as collateral, meaning you don’t need as much initial capital to open your position.
This makes it a more flexible option for hedging, especially if you want to avoid locking up significant funds in collateral. However, the downside of this approach is the risk of liquidation. If you’re using a high leverage, a small price movement against your position can lead to a liquidation, causing you to lose your collateral.
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 = $13,472, a -10.18% loss
We use 5,000 USDT as collateral and open a short position for 1,000 TON (assuming TON = $5). No leverage is used in this example, but it can be adjusted according to your risk tolerance.
You can set a stop loss at the minimum tick of your price range on TONCO to protect against a significant price rise ($4.5 from the example above). This ensures the position on Tradoor closes if the price moves unfavorably.
After the TON price drops to $4 you withdraw ≈2,040 TON from TONCO. But since TON’s price dropped, the short position you opened on Tradoor became a profitable trade for you. You should profit 1,000 USDT (1,000*1) after closing the short position and withdraw initial 5,000 USDT collateral back.
You have to pay $4.5 service fee (0.09% of the position size).
The total would be:
— $8,160 (from the sale of 2,040 TON at $4)
— $1,000 (profit from short position)
— $5,000 (collateral returned)
This gives you:
$8,160 + $1,000 + $5,000 = $14,160, plus:
— Trading fees ($1,232 from the example above)
Grand total:
$14,160 + $1,232 = $15,392, a +2.61% net 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 shorting TON, you’d long it.
Use 5,000 USDT as collateral on Tradoor to open a short position for 1,000 TON (assuming TON = $5). You can place a stop loss at the minimum of your price range to protect against price increases.
Provide liquidity with $5,000 USDT and 1,000 TON on TONCO DEX.
This brings your total position value to $10,000.
