Could sETH Provide a Model for Security Token Short Sales?
Business, Tokenization 101

Could sETH Provide a Model for Security Token Short Sales?

sETH is the first short token available for decentralized trading. The new token must be purchased with the DAI Stablecoin, and can allow for increased risk management in a bear market. The value of sETH shares an inverse relationship with ETH: when ETH goes down, sETH goes up— and vice versa.


Short Positions with Distributed Ledger Technology

Short purchases and sales are generally restricted to experienced investors: they carry a significant amount of risk.

A short position is when an investor sells a security which they anticipate will drop in value in the near-term. If the price drops, the investor buys the security back at a lower price, and therefore makes a profit. If the price increases however, the investor is left to purchase the stock at a higher price than it was sold, resulting in a financial loss.

According to Radar Relay, sophisticated investors have demonstrated an interest in tokenized short positions for the last year.

Thanks to the team behind dYdX— a platform which allows for the open source protocols of decentralized margin trading and derivatives— short tokens are now available.

sETH: The First Short Token to Enter Decentralized Trading

sETH— short Ethereum— is already available on Radar Relay. It’s a short position taken from an Ethereum token and built through the dYdX protocol. The new ‘short token’ can be traded directly from a wallet, just like any other ERC-20 token.

The benefits of sETH bring a new aspect of trading to the world of asset-backed tokens, frequently called security tokens. The new token provides users with the ability to diversify a portfolio, while maintaining custody of assets.

sETH is tied to USD-backed stablecoinDAI’, which is used for the funding, purchasing, and selling of sETH.

Investors experience a return when the price of ETH goes down and suffer a loss when the price of ETH goes up. In short, ‘down is up, and up is down’.

All aspects— from creation to settlement— are established through decentralized protocols. This eliminates the need to work with lenders, centralized entities such as exchanges, or orders at the time of close. In this sense, short tokens can offer significant advantages when compared to traditional financial securities.

The Unknown Future of Short Tokens in the Current Early Industry Stage

Security tokens are perhaps one of the most anticipated developments of blockchain technology. Some predict the future of a $10 trillion industry within five years, with many saying STOs are the new IPOs.

Given such an atmosphere, the arrival of short tokens was inevitable. The question now shifts to whether sETH will provide the industry-wide blueprint for additional short tokens— or if a different method will emerge.

What do you think of the sETH short token? Will short tokens become a popular dimension of the developing security token industry? Let us know what you think in the comments below.


Image courtesy of shorttokens.

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October 28, 2018

About Author

SamBocetta Sam Bocetta is a retired security analyst with over 35+ years working in the public and private security sector advising against cyber warfare. Sam has worked with some of the largest global defense companies developing integrated systems for security and communication. Despite his previous work experience, Sam is a strong supporter and believer in decentralization.