Trust me, if you stay long enough in the crypto space, money would become a side gig for you. No, I am not referring to the gains here. I am talking about the endless learning opportunity at hand that you would start caring lesser about money and start viewing the big picture. Think of it like this. Ever since I have got into crypto space, I have had an opportunity of learning some key economic concepts. I have got a slight idea of how databases work, supply chains, gaming, virtual worlds and what not. You pick any crypto niche and it should help you connect the dots.
One such domain that has been really intriguing for me is decentralized finance. This use case of blockchain has taken the traditional banks head-on. If you deal in stock market, this might not be a brand new piece of information for you. However, the way it’s executed in DeFi space is absolutely amazing. So, without further build up, let’s find out what Fulcrum is!
What is Fulcrum (In General, Outside Crypto)
I wrote this blogpost on the fly, literally. While I started writing it, my wife, who was sitting next to me, mentioned, she knows about fulcrum.
Probing a little deeper, she told me how we were taught about in 8th standard physics. That’s when I drew parlance between this protocol and what it meant in real life. So I decided to share a quick summary of the same here as well so that each one of us could contextualize better.
In simplest terms, its a way of lifting heavy objects with minimum force. This force is boosted by using a pivot. The image below will give you a fair idea of what I am talking about. So, the larger the arm, lesser is the force you have to apply to lift the heavy objects.
And that’s primarily what Fulcrum does. It is a protocol that multiplies the money that you have into 2x, 3x, 4x etc. so that you gain much higher than what you originally had (if you had just invested your money in hand)
As lucrative it may sound, its not risk free. And we are going to talk about all of that in detail in the upcoming section.
What is Fulcrum Protocol?
Fulcrum protocol is essentially something that allows you to trade on margin using crypto. You can have the power of 2x,3x up to 5x using the protocol. It is an extremely useful tool for the traders that are really good at predicting the market swings or may have some inside knowledge. Let’s understand how is this beneficial or risky using a couple of examples:
Imagine that ETH is at $1000 and you purchase something called 5x long. Jargons aside, this means that if you had $100 to invest, this gives you that ability to invest $500 instead.
In this case, lets assume that goddess of fortune was on your side and ETH actually moved from a $1000 to $1500. That’s a 50% jump. Since you were long by 5x, your gains were actually 250%. How? Because you only had $100 to begin with. But instead of regular $50 profit that you could’ve made, you just made a whopping $250. Sweet right? Let’s checkout the flip side of this coin before concluding.
This time everything remains the same but the Ethereum price starts to tumble. So much so that it falls by 24%. Since your risky ass was long by 5x, you’re now experiencing a loss of 120%. At this point, the initial $100 that you had deposited is lost. This is also called liquidation. When you lose your initial holdings due to the market swing in opposite direction that you had intended.
So, if you don’t know what you’re getting into, it’s better to stay safu than getting liquidated.
How Does Fulcrum Work?
I’m sure that if you’ve understood the theory so far, you must be etching to give it a try yourself. So how does Fulcrum protocol work? How do you create these so called long and short positions? That’s exactly what we’re about to discuss in this section.
Creating a Long Position:
Once again, people versed with stock market know how understand what this means. For the rest of us, you create a long position when you feel that asset you’re investing in is going up in price. You could also hear someone say, “I am long on ETH”. Which essentially means the same.
So in case you plan to go long on ETH, you first buy some ETH from a centralized exchange like CoinDCX and transfer it to your wallet. Then you deposit that ETH into fulcrum. In return, Fulcrum allows you to take a loan of 80% of your deposited amount.
Say ETH is worth $1000 and you buy and deposit 1 ETH in Fulcrum protocol and borrow $800 worth of USDT from Fulcrum. So, protocol now owes you 1 ETH and you owe them $800.
You take that $800, buy some more ETH and come back and deposit the entire lot to Fulcrum. Now, you can loan another $640 (80% of $800). You can basically repeat the process multiple times.
At the end of the process, Fulcrum owes you 2.44 ETH and you owe them $1952. At the same time you have $512 worth of USDC in your wallet.
Lucky for your ETH doubled. You make a handsome profit. As your ETH is now worth $4900. You originally had $1000 to invest. Despite ETH only doubling, you made a 5x on your investment.
Now imagine that if ETH had moved in the other direction. At a point where you owed Fulcrum more than it owed you, you would have lost everything you deposited and got liquidated.
In simple terms, the more times you carry out this process, higher is the risk and higher is the multiplier of your gains or losses.
Creating a Short Position:
Short is exactly the opposite of a long position. It is situation wherein you would bet on the prices of an asset going down. Which is why, if prices go down, you profit and vice-versa.
For creating a short position on Fulcrum, you would do exactly opposite to what you’d do for a long position. This time, you’d deposit USDC and borrow ETH from the protocol and continue the same process over and over depending on your risk appetite.
Fulcrum as Passive Income Generator
For any platform that you invest in, simply try to ask one question before you dive-in. Where’s the money coming from? If you don’t get your answer, it’s better to stay put.
Coming back to Fulcrum. How is Fulcrum able to provide you with margin? What’s their source of money? Well, that’s where this section is coming from.
As an individual, you can deposit your crypto to Fulcrum platform to help them lend it to other people. What do you get in return? That’s right. Interest income. Different cryptos have different APYs. The protocol then uses this crypto to lend it to people.
Also, when you go 5x long/short on an asset, its not free of cost. You are charged at a price of 12% APY for the same. So that’s the sweet little cycle of money that runs within the Fulcrum ecosystem. Helping traders and investors alike.
Crypto investing is more like Start Up investing. You still don’t know how the project is going to pan out in the future. So the best possible way of building a narrative is to actually use the product and take a call.
That’s what I intend to do in coming few days. I will be trying out different protocols in DeFi space to gather a perspective.
Are you up for the game?
Got questions? Want to take it to the next level? Reach out to me using your preferred platform from the links below
Until next time..
Btw, if you are a seasoned trader or just testing the waters with derivatives, here’s an exchange specifically meant for that. Head over to MCS using this link. Still not convinced? Join the vibrant community that is talking about MCS on Telegram, here.