There’s good news for Dr. Doom—you can now make money when crypto crashes, without needing to go through Augur or a centralized exchange. Radar Relay, a decentralized exchange built on the 0x protocol, has announced the launch of a new kind of asset—short tokens, which provide a payoff if the asset behind them declines in value.
The first new token will be sEth, representing a short position against Ethereum. “Creating a token that allows for such functionality is a rather complex and difficult problem,” Radar Relay said in a Medium post. “[T]he dYdX team has been hard at work to bring new types of financial products to the cryptocurrency market.”
The Big (Decentralized) Short
In real-life exchanges, traders establish short positions by “borrowing” an asset that they expect to lose value. For example, if you expected Elon Musk to get in trouble, you might borrow some Tesla stocks and then sell them at market price. After the price drops, you’d then buy them back, return them to the lender and pocket the difference.
That’s a trickier proposition in the world of decentralized assets, where private keys are the only real form of ownership. Although traders have developed ersatz means of betting against crypto, like through Tether, the only real short contracts to date are on centralized exchanges like Kraken.
This marks the first time where short contracts have been coded into a dApp token. “When you hold a Short Token, your returns depend on the inverse price movement of the underlying Token,” according to a brief explainer. “For sETH/DAI, when the price of ETH goes down, sETH price goes up.”
Each Short Token represents a 28-day contract, during which time the tokens can be traded and sold as easily as an ERC-20. For example, sETH 6/15 represents a short against Ethereum that expires in mid-June. At the end of the contract, the tokens “expire and lock to the market price,” at which time the payout can be withdrawn in DAI stablecoins.
The tokens are built on the dYdX exchange protocol, which is designed for decentralized margin and leveraged trades on the Ethereum blockchain. “Now users can get margin exposure by simply trading an ERC20 token,” dYdX Head of Operations Zhuoxun Yin said, in a press release. “Decentralized exchanges are a natural platform for Short & Leveraged Tokens, and we’re thrilled that Radar Relay is the first to support them.”
Although only Ethereum shorts will be available at first, Radar Relay says that it is looking forward to tokenizing other short contracts—which means it may not be long until there are tradeable short contracts against Bitcoin or EOS.
While shorts are a recent introduction, the dYdX exchange has plans for more complex smart contract tokens—including options, margin lending and more exotic derivatives, to allow traders to take positions at different levels of leverage and risk. At present, these are projected for release sometime next year.
The author has investments in Ethereum, which is mentioned in this article.