QuiD Protocol
Risk Reversal Stategy
Short Crypto without getting Short-Squeezed
Users desiring to short cryptocurrencies acceptable as collateral in QuiD must first obtain some QD (by borrowing, purchasing on open markets, or executing Reverse Redemptions). Then, crediting -$ in QD as a liability against Creditors pledging ₿, Debtor borrows $ worth of ₿ while pledging 110% of $ as collateral in QD. The Debtor immediately sells ₿ exogenously, finally enacting a quid pro quo with the Creditors by selling them a put and buying a call from them, thereby:
  • promising he’ll buyback ₿ from the Creditors at no less than 10% < $ if ₿’s price falls by >10% (putting a limit on Debtor’s potential gain and LPs’ potential loss);
  • calling for the ability to buyback ₿ at no more than 10% > $ (protecting against short squeeze and limiting Creditors' gain in the event of >10% growth in ₿’s price).
In summary, Debtor owes ₿ and is the source of credit risk created in this setup. Thus, the put being "sold" by the Debtor is priced into the call being "bought". While it does also provide them downside protection on ₿, Creditors don't pay the Debtor for their put since they provide perpetual cover against short squeeze through a Risk Reversal strategy.
The Creditors are short the call (losing money when it’s exercised) and long the put (saving money when it’s exercised). If ₿’s price goes down by more than 10%, this protects the Creditors who are now in-the-money for selling ₿ back to the Debtor (who sold them a put and now must buy ₿, limiting his profit to $ minus strike) for less than $ but more than spot, thus clearing at a discount the Debtor’s -$ liability.
If ₿’s price rises >10%, the Debtor is in-the-money for buying ₿ back at less than spot from the Creditors. The Debtor forfeits their QD collateral, cash-settling the -$ liability without ₿ even changing hands, which makes up the Creditors’ 10% profit. The forfeited QD then enters Dead Pool, automatically clearing the QD debts of liquidated borrowers.
Since the Debtor already lost their collateral and walked away without returning the ₿ they borrowed, how do we account for the difference between $ + 10% and the current price of ₿ if it went up more than 10%? It wouldn't be fair to leave Creditors without this upside, so we book this remainder as crypto debt into the Dead Pool, and allow it to be cleared by Reverse Redemptions.
Last modified 3mo ago
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