question about “short farming” positions


someone recently mentioned the strategy called “short farming” to me. Which goes like this:
You are expecting, lets say, MATIC to go down in price in the near future. Then you borrow MATIC and put that in a LP position. Lets say MATIC/WETH.

Thats how it was preseted to me. My question is:
a) If I put the borrowed MATIC in a LP position, then I (theoretically) still hold them and participate in the downfall of its price
b)Shouldn’t I have to sell the borrowed MATIC immediately and rebuy them after the anticipated price drop (and close the borrow position) to have this really be a “short” and make the pricedrop of MATIC positiv for me.

I dont really get the logic behind this strategy. Pls help me understand. Is it just because I farm with “borrowed” tokens?

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3 thoughts on “question about “short farming” positions”

  1. If you sell the borrowed matic and hold (or yield farm) stablecoins, that’s a classic short position.

    If you don’t sell the borrowed matic and use it for LP you will lose if the price of MATIC drops. Part of your loss will be offset by swap fees. It’s possible to earn more from swap fees than you lose due to the MATIC price falling, but this is not what people normally refer to as a short position.

    In addition, if you expect prices to rise or fall a lot it’s probably not a good idea to provide liquidity on a DEX, as you’ll suffer IL.

  2. If you don’t sell it you have a net neutral position – your debt decreases if MATIC falls but so do your assets. You have to sell the MATIC to go short, as you say.

  3. if matic pumps, you will lose money as you owe back more than you have currently. the pool will be heavier in eth than matic so when you withdraw, you’ll have less matic than you started with. with that said, i do this with link and it works really well. currently doing it with wstEth/eth as well as it’s pretty low risk and giving 5-7% with a borrow rate of 0.07% on arbitrum aave.


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