Automated Position Hedger (APH) is the protocol behind the FWX DeFi platform which tries to increase real demand in Lending-Borrowing service. This APH protocol will work with 2 services : Derivatives Exchange and Lending-Borrowing by acting as counterparty to instantly match every user’s orders in Perpetual Futures with borrowing assets in the platform’s pools to match them. In this article, we will explain about APH and how it works.
What is the problem in Lending-Borrowing service today?
The Forward platform has been developed under the concept “Make protecting your crypto gain and accelerating your crypto wealth simple” – this occurs via two main services: Lending-Borrowing and Derivatives Exchange. It is evident that for lending-borrowing on DeFi, most users come to deposit their assets for the purpose of lending, but few users need to borrow. In this situation, interest paid out to the lenders will decrease significantly because there is little demand to borrow (most DeFi platforms calculate APR in lending-borrowing services from demand and supply, this means that if demand for borrowing money increases, the APR from both lending and borrowing will increase as well).
In a Derivatives Exchange service, our platform does not act as an exchange, rather, it acts as a dealer – in order to match every user’s position. If a user opens a long position, Forward will open a short position to match that order.
The question is, if every user opens a long position and the price goes up – meaning users gain profit from that position and Forward takes all the loss – would the Forward platform crash?
The answer is No!, it wouldn’t. This is due to the Automated Position Hedger Protocol which we will describe below.
What is an Automated Position Hedger and How does it work ?
What is an Automated Position Hedger ?
The Automated Position Hedger (APH) is a protocol that is used to hedge risk (from derivatives) to Forward. This protocol will automatically activate when a user opens a position in which the platform must borrow assets from its own lending-borrowing pool to match that user’s orders.
For instance, if a user opens a long position then the APH protocol will hedge risk by borrowing a stable coin, swapping to an asset and then holding said user’s open position. On the contrary, if a user opens a short position then the APH protocol will hedge risk by borrowing assets from another user’s open position – swapping the assets to a stable coin and then holding said coin.
How does it work ?
Let’s illustrate with this example, suppose that a user opens a long position in BNB:
- User opens long position in BNB at a price of $300 with a collateral asset
- APH protocol borrows 300 USDT from the platform pool
- APH swaps USDT to BNB from DEX and holds
In the positive way: BNB price increases to $350
- User closes their position at a price of $350
- APH protocol swaps 1 BNB from 3) to 350 USDT
- APH Returns 300 USDT to the pool and pays 50 USDT to user
In the negative way: BNB price decrease to $250
- A user closes their position at a price of $250
- APH protocol swaps 1 BNB from 3) to 250 USDT
- APH takes 50 USDT from said user’s collateral asset and returns to 8) which is therefore equal to 300 USDT and results in a loss.
The work of Automated Position Hedger (APH) in Long-Position
What about short positions ? … Let’s illustrate it once again, suppose that this user decide to open a short position in BNB:
- User opens short position in BNB at price of $300 with a collateral asset
- APH protocol borrow 1 BNB from platform pool
- APH swap BNB to USDT from DEX and holds
In the positive way: BNB decrease to $250
- User closes their position at a price of $250
- APH pay 50 USDT to user and remain 250 USDT
- APH protocol swaps 250 USDT from 5) to 1 BNB in DEX
- APH return 1 BNB to the pool
In the negative way: BNB increase to $350
- User closes their position at a price of $350
- APH receive 50 USDT from user and hold 350 USDT in total (300 USDT from swap and 50 from user’s loss)
- APH swap 350 USDT to BNB from DEX and return to pool
The work of Automated Position Hedger (APH) in Short-Position
As we can see above, no matter how much assets are fluctuating, there’s no effect on the platform. The APH protocol can protect Forward perfectly even if we work with derivatives. The platform can pay you a reward if you make a profit from your position, all the while it can stabilize the liquidity in each pool. The APH protocol will help the platform to create real demand for borrowing in the lending-borrowing service. Ultimately, the result is that a greater number of users in derivatives means the interest paid to the lender will be higher.
APH is the protocol that will create “Real Yield” to the crypto industry because today, most DeFi platforms compete with incentive to attract users without caring about sustainability. Forward team built this protocol by believing that crypto and blockchain will be the next generation of finance and they want to break a ponzi wheel and create a sustainable platform for every user without worrying about the crash event.