Fifth Element: Ghost stable arb with hedge

Okay, what's The Problem™️ with my @TeamKujira Ghost-borrow-arbs up to this point?

They're basically shorts, right? You borrow, then straightaway, sell them to arb.

What happens if the markets sky during your arb?

You're eff'd.

I don't like being eff'd, personally. 🥺🙄

... "They're basically shorts."

Hold that thought.

Pigeonhole it, but hold that thought for now.

(Yes, another ANOTHER HOWTO is forthcoming)

(Yes, my mind never stops. Yours?)

Hedging the borrow with a long

So: short. That's one theme to explore.

If the borrow-then-sell an asset is equivalent to a short, then the way to hedge against a sudden market surge (that happens to me on too many arbs, I'm piqued to say), is to open a corresponding long at the same time as the borrow. VOILÀ!

Let's start a working example to illustrate, and make money, because: no dur.

I consult ./vern (my main man: ./vern) who says there's a nice arb on $LUNA.

• LUNA,axlUSDC,OSMO,ATOM,KUJI,LUNA

So, before I borrow $LUNA, I place a 2.2xLONG on 50 $LUNA on the FIN LUNA/USK board.

THEN I borrow 50 $LUNA from Ghost.

With the 2.2xLONG in place, if $LUNA skies, I make out like bandits by closing the long, and paying back the borrow with the profits.

If $LUNA DOESN't sky, then my arb goes through, and I pay off the borrow from the arb.

I'm covered, then, either way.

The point of all the above is to protect yourself from (sudden) market movements.

How do we do this?

A borrow (from Ghost)-then-sell is equivalent to a short; you hedge a short with a long.

That's one approach (hedge short with a long).

There's an entirely different approach.

I eventually do close this arb from a big spike on the KUJI/LUNA board.

Playing both sides

Here's the entirely different approach.

Play both sides of an order book. That way, if the markets go up, or if the markets go down, your arb works, either way.

"Which order book? and how?" you ask.

Fair questions.

The answer is "which asset can you both sell and buy on FIN that you can borrow from Ghost?"

It's a bit 'magical,' but if you consider $axlUSDC and $USK to represent the same thing: a stable coin, you can borrow both from Ghost, and they conveniently marry up on FIN axlUSDC/USK.

The 'magic' of this approach is this: whichever way the markets go, you win.

• If the markets go up, your sell-order hits, creating $USK
• If the markets go down, your buy-order hits, creating $axlUSDC

Okay, so, whichever way the markets go, an order hits.

So what?

That's half the story. So, say, the ratio goes up, and you get $USK from your sell order.

You place that $USK in the buy-range, wait for a ratio-fall, then, ch-CHING! you now have more $USK than you borrowed! YAY!

Those of you with experience doing the axlUSDC/USK-arb will immediately see a problem

1. you have a buy- and sell-order
2. the sell-order hits, you claim that, and place a buy-order

You now how 2 buy orders: you're dependent on the markets again.

Problem: not solved. 😢

In practice this problem is easy to (re)solve.

In the above scenario, you have 2 buy orders, so, place another sell-order.

Market balanced: restored.

"But what if the markets keep going up ... forever?"

This is a problem? Really? Say that out loud like it's a problem.

I'll wait.

Again: in practice, this doesn't happen. Yes, it's a risk, and you're left holding the bag, right?

Nope.

Why?

The neat thing about unfilled orders?

You can always cancel them, and get your money back.

You don't have to have 35,962 orders placed on the axlUSDC/USK book. You can cancel the WAY out of range orders and repay your borrows.

With this out in your back pocket, ... wow.

Just wow, folks.

This means:

1. you get to borrow money at a really low rate (1%-6% rn)
2. you get to make money with borrowed money, that is: OTHER PEOPLE's MONEY! 😱
3. you get to back out any time you feel the heat's too hot.

Risks

So, but with the axlUSDC/USK-arb, borrowing from Ghost, you're not going to get rich quick(ly).

I can borrow 50 $LUNA and make 5 $LUNA in one arb. I did that today.

axlUSDC/USK happens at the rate of, say, $1 gained from two trades of $100.

It's slower, but less risky.

Also, borrowing stables can be expensive, up to 6% borrow rate (annualized), whereas borrowing a volatile coin, such as $LUNA, the borrow rate is usually only 1%.

So you have to watch your borrow rates when borrowing stables.

Just do it!

"So, geophf, given these risks, are you going for the Ghost-borrow stable-arb?"

You betcha. Not only: 'you betcha,' but: you betcha in a big way.

I've set this arb in motion tonight, and, given I prove this out, this is going to be a standard investment tool I go to.

The. End.

Postlude

The markets DID go in a direction (huh! amazing! the markets move. FANCY THAT, HEDDA!), the ratio going up, so I claimed the sell-order and now have 2 buy-orders.

So, I borrowed more $axlUSDC against $KUJI (that I bought with $axlUSDC, hehehe) 

and placed a sell-order.

The balanced-approach is restored. Once again I'm market-neutral: if the ratio goes up, I make money on the sell-order, if the ratio goes down, I make money on the buy-orders.

Either way, I win.

If the markets stay in one direction, I can alway cancel orders and repay borrow.

Case in point

Markets go up; markets go down.

This time, the ratio dipped, filling a buy-order, 

...so my buy-sell orders just magically rebalance when I take this buy order and immediately place it back on the axlUSDC/USK board as a sell-order.

When the sell-order I just placed (PT) fills, I'll take that $USK and close the borrow, AND have some left over: that's the arb, that's the gain, and it's all from OTHER PEOPLE's MONEY!

Suh-WEET! 🎉

I'll report that out when that occurs.

... some time later

HA! The opposite happened: the BUY order filled, completing an $axlUSDC borrow against $KUJI (one of them)!

SO!

• I collect the order
• I repay the borrow

• I lend the remainder (smol tho' it be) to Ghost

• I ...

... well, I get on with my life. 😊

ROI: 1%, annualized to 847% APY

Raison d'être

Two things to the 'why' I do the above.

1. Why do I repay the borrow, if I'm just going to borrow the same amount and do the same thing, all over again?

Two reasons:

1. It brings that borrow to closure
2. It resets any borrowed interest

2. Why do I lend that minuscule amount of $axlUSDC to Ghost?

I'm treating Ghost as my bag-repository, so the bags I accumulate go to Ghost lend, growing over time as x-tokens (when all the markets open). 

I deposit that smol amount of $axlUSDC to show my bag growing over time.