Hyperdrive is a DeFi protocol that enables users to gain exposure to both fixed and variable interest rates in a single product. In this article, we focus on Short positions—an opportunity to profit when the variable rate outperforms the fixed rate. However, to understand Shorts, it's crucial to grasp the concept of hy[Tokens], the heart of the Hyperdrive market.
Introducing hy[Tokens]
hy[Tokens] are the core of the Hyperdrive protocol. They trade at a discount but mature at their full face value, reflecting interest rate dynamics in a single-price mechanism.
Let’s suppose you purchase 1 hyUSDe at 0.95 USDe.
At maturity, each hy[Token] is redeemable for 1.00 USDe. The underlying base asset (USDe) is deposited in a yield-bearing source (sUSDe) and will accrue interest in real time.
Long Positions
- A Long position means buying a hy[Token] at a discount (e.g., 0.95 USDe) and redeeming it at full face value (1.00 USDe). This locks in a fixed return (the difference between purchase and redemption).
Short Positions
- A Short position means you only pay the discount portion (0.05 USDe) but collect the variable yield on the entire 1.00 USDe. You profit if that variable yield on sUSDe exceeds the 5% difference you paid upfront.
A Closer Look at Short Positions
In a typical lending market, shorting often implies borrowing an asset to sell it, hoping to buy it back later at a lower price and repay it.
In Hyperdrive, however, a “Short position” means committing only the discount of a hy[Token] purchase price while receiving the variable yield on the entire face value of that hy[Token].
Let’s get back to our example:
A hyUSDe priced at 0.95 USDe is trading at a 5% discount—there’s a fixed yield opportunity for Long positions based on the sUSDe yield source, as hyUSDe will be priced at 1.00 USDe at maturity..
The Short trader requires just 0.05 USDe (the discount) to gain exposure to the variable yield on the full 1.00 USDe face value.
During the Short’s life, they benefit from the interest the underlying yield source (sUSDe) accrues.
If that variable yield exceeds the fixed rate paid upfront, the short trader profits.
If not, the trader may break even or incur a loss.
The Short trader has effectively “sold” a fixed yield to the Long trader, paying a fixed portion upfront. In return, the Short trader collects all the variable interest generated over the Short’s term.
Their return profile can be summarized as follows:
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Fixed cost: The upfront discount paid to open the Short.
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Variable income: The yield earned on the full face value of the hy[Token].
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Potential profit: If the variable interest exceeds the effective fixed rate paid.
Opening a Short Position
Opening a Short in Hyperdrive follows these steps:
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Deposit the discounted portion: The trader pays only the discount of the hy[Token] price.
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AMM covers the principal: The Automated Market Maker “lends” the rest of the position.
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Leverage effect: The Short trader earns interest on the full face value—not just on their initial deposit.
Example:
hy[Token] discount = 5% (fixed interest) → Short trader deposits 0.05 USDe.
They now receive interest on the full 1.00 USDe exposure → Underlying variable yield = ~8%.
Short earns 8% of 1.00 USDe = 0.08 USDe.
Net gain = 0.08 – 0.05 = 0.03 USDe (before fees).
This leverage is especially attractive if traders anticipate rising or persistently high variable interest rates in the underlying yield source of the selected pool (e.g., a Liquid Staking Token, such as Lido’s stETH).
Holding to Maturity vs. Closing Early
Short traders have two options:
Holding to maturity:
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The trader pays the full fixed rate (the discount) over the entire term.
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They collect all the variable interest earned.
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Profit occurs if the variable rate outperforms the fixed rate.
Closing the Short early:
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The trader pays the fixed rate for the elapsed period.
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They sell back the remainder of their Short to the AMM.
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A change in the hy[Token] discount can generate additional profit or loss.
Example:
A trader opens a Short when the hy[Token] discount is 5%.
The variable rate rises, causing the hy[Token] price to drop further.
The trader closes early at a 7% discount, capturing additional profit.
How Shorts Influence the Market
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When variable yields spike, new Short positions quickly emerge: Arbitrage traders take advantage of differences between fixed and variable yields, driving the market toward equilibrium.
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Short traders help stabilize the market: Selling hy[Tokens] short can lower their price, increasing the fixed rate and making Long positions more attractive.
Conclusion
Short positions in Hyperdrive offer a powerful way to capitalize on higher variable yields with minimal upfront capital. By paying only the discounted portion of the hy[Token], Short traders gain exposure to the yield on the entire principal amount. This leverage can significantly boost returns—especially when variable rates rise.
Hyperdrive Protocol bridges the gap between traditional financial markets and DeFi. As the global fixed-income market gradually moves on-chain, Hyperdrive simplifies the execution of popular fixed-income trading strategies while leveraging DeFi’s efficiency and transparency.
As the owner of the Hyperdrive Protocol instance, ElementDAO’s Discord server is where you can stay updated and connect with other contributors exploring and building on Hyperdrive.
