Trade
Unlock the Missing Half: Profit from NFT Price Drop
Last updated
Unlock the Missing Half: Profit from NFT Price Drop
Last updated
The ability to short relies on the ability to borrow an asset. With Particle protocol, traders borrow NFTs from suppliers and sell the NFTs to marketplaces on-chain; when the floor price of the NFT collection drops, traders can buy any NFT from the same collection to return. The price difference is the realized profit for the trader. There is zero platform fee for trading.
In the following, to concretely understand the life cycle of a short position, we describe the basic composition of a short position, how profit and loss (PnL) are made, and how interests are accrued.
When supplying an NFT to Particle protocol, each supplier specifies a desired Collateral for the position. To open a short position, a trader needs to deposit a Margin and sell the NFT to a marketplace on-chain. The margin, together with the actual sell price of the NFT, must add up to the collateral, which is then locked in the smart contract while the position is open. The figure below describes this following formula:
Margin + NFT actual sell price = Collateral.
To close a position, the Particle frontend aggregates the current cheapest NFTs from different marketplaces for traders to buy, using up to the ETH amount locked in the position. Alternatively, traders can acquire an NFT from elsewhere to repay directly (accounted as 0 buy price). Upon position closing, the realized PnL for trader is
Realized PnL = Sell Price - Buy Price - Accrued Interest.
Any leftover portion of the margin is returned to trader at position closing. After position closing, if the trader makes a profit (i.e. the NFT price decreases), the margin will return to the trader, together with the realized profit. On the other hand, if the trader takes a loss (i.e. the NFT price increases), part of the margin will be used to purchase the more expensive floor NFT. The figures below describe the profit and loss scenarios.
By default, all returned amount is deposited into trader's account balance on-chain, for more efficient gas usage. The account balance can be withdrawn into ETH any time, and it can be used to pay margins for new positions as well.
Each position comes with a demanded interest rate from the supplier. Among the competitive offerings from multiple suppliers, a lower margin (i.e. smaller collateral) typically incurs a higher interest rate, and vice versa.
The interest is only paid at the time of position closing (e.g. as shown by the profit and loss scenario figures above). Also, the accrued interest is paid from the realized profit or already deposited margin (i.e. no extra deposit needed).
For simplicity, the interest is accrued linearly by the rate. Particle frontend shows the daily interest payment in ETH for easier calculation for traders.
The positions on Particle protocol are perpetual. There is no expiration time for the positions. The NFT suppliers, however, have the flexibility to start an auction. The auction lasts 36 hours and it is a best effort to acquire an NFT from the market using all available liquidity, with PnL returned to the trader. To balance the dynamics, traders also have the flexibility to refinance to other supplier at any time. Details are in the corresponding pages.
