Long and short concepts intro

Expanded version of this section: https://medium.com/@cetrafinance/delta-neutral-defi-strategies-overview-d0617561a1f4

DeFi building blocks

Let's break decentralized strategies and portfolios into basic building blocks: funds on wallet (hold), funds in staking/lending/LP pools, borrowed funds (that we need to return).

To talk about exposure, we need to define the notional currency (currency, in which we count profit and loss). In further examples let's consider USDC as notional.

Simplest examples

Imagine, that you borrowed 1 WETH (for example on AAVE), swapped it into 1500 USDC and putted it into stableswap (like curve) liqidity providing pool. When closing position, you need to swap USDC back into WETH. So if WETH price increased, we need more than 1500 USDC to pay back the debt, incurring losses. If WETH price decreased, you can swap only part of initial 1500 USDC to pay back WETH debt, having remainder as profit. This example illustrates that borrow position is effectively "short WETH", because we gain profits, when WETHprice drops and incurr losses when it rises. The "hold" position on any asset or its staking version, that can be unwrapped into underlying obviously can be called "long", as its USD value increases proportionally to asset price.

LP specifics

Usually, when we deposit asset into AMM pool, we take exposure on multiple assets. In addition that exposure will vary as the relative price moves. Depositing 1 WETH into WETH-BTC pool, we will always have 50/50 (in USD equivalent) exposure. But amounts of tokens will vary, causing Impermanent Loss: if WETH price increases faster than BTC price, we'll own less WETH and more BTC, always "holding" more cheap and less expensive token.