Repo Trades

The Repo trade is Longship's novel delta-neutral short instrument.

Repo trades represent the short side of the market and exist to offset the long exposure for the AMM of a given Longship market. Repo traders lend the AMM tokens in return for a fee. Here's how they work:

When a Repo trade is placed, the loan value is recorded in USD terms and a guaranteed USD-denominated yield rate is locked in for a fixed period (e.g. 24 hours). After the period, the trader gets back the full USD value of their deposit plus the pre-determined yield, no matter how the market moved.

For example, if a trader deposits 1 ETH worth $1,800 and locks in a 1% yield, they will get back $3,535 worth of ETH ($3,500 deposit + $35 yield), regardless of whether ETH moves up or down. Note that the quantity of ETH the trader gets back will vary depending on the price movements of ETH. If the market moves down, the trader will get back more ETH than they deposited. If the ETH's price increases, they get back less ETH.

This structure is essentially a short, because the trader gains value in terms of the underlying token if the given market declines and loses value in terms of the underlying token if the market appreciations.

Put another way, Repo traders are sacrificing their upside in exchange for downside protection and collecting a premium for doing so.

The critical characteristic of this particular short structure is that Repo traders always gain value in USD terms, even when the market moves up. This delta-neutral return profile matches the desired exposure of an enormous segment of the crypto markets that wouldn't otherwise be interested in a short position.

Note: Repo traders probably weren't holding the underlying token prior to taking the Repo. More likely, they swapped into the underlying an instant prior, solely so they can take the Repo. As a result, tokens with deeper spot markets will likely have more Repo interest and thus more long capacity with cheaper leverage on Longship, and vice versa for thinner spot markets. This is a healthy dynamic. Longship shifts the constraint on leverage capacity from the amount of short interest to the depth of the spot market—a big improvement to the status quo.

Who Might Be Interested in Repo Trades:

• Credit funds with USD benchmarks.

• Yield aggregators that are constantly optimizing delta-neutral returns.

• Stablecoin farmers that may also want to utilize Longship's stablecoin vaults .

Liquidations

Repo trades may be liquidated in the unlikely event of a market's bankruptcy. If the AMM is “short” bankrupt, Repo trades can be liquidated at cost (not promised value). However, Longship has explicit bankruptcy rules that discourage traders from maintaining trades that could cause bankruptcy.

Also, note that because each token has its own isolated market, one market's bankruptcy will not cascade to other markets.