Repo Trades
Last updated
Last updated
The Repo trade is Kubo'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 Kubo 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, 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 moves.
For example, if a trader deposits 1 ETH worth $3,500 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 will get 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 the underlying token if the market appreciates.
In other words, Repo traders sacrifice their upside in exchange for downside protection and collect a premium.
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 didn't hold the underlying token before taking the Repo. More likely, they swapped into the underlying an instant prior solely to 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 Kubo, and vice versa for thinner spot markets. This is a healthy dynamic. Kubo shifts the constraint on leverage capacity from the amount of short interest to the depth of the spot market—a significant improvement to the status quo.
Credit funds with USD benchmarks
Yield aggregators that are constantly optimizing delta-neutral returns
Stablecoin farmers that may also want to utilize Kubo's stablecoin vaults
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, Kubo has explicit bankruptcy rules that discourage traders from maintaining trades that could cause bankruptcy.
Also, note that each token has its isolated market, so one market's bankruptcy will not cascade to other markets.
