Delta neutral strategies and plans for Ariadne protocol
Greetings readers! Today we want to draw your attention to delta neutral strategies — a way to make money in crypto, which is ignored by many. We also want to let you know about our plans for the future of the Ariadne protocol.
What’s happening now on the market
Where do we find ourselves in the current crab market? The total market cap of crypto is $1.1 trillion. We are witnessing a so-called “hated rally” as the market is showing relief after months of constant falling. We have to deal with the consequences of big crypto companies, and venture capitals going bankrupt, but also there is a lot of FUD in the air. US GDP fell 0.9% in the second quarter following a 1.6% decline in the first one, and the economy is technically in a recession.
Buying now feels risky and selling now seems foolish. The crypto market is unpredictable, we have positive price reactions to negative news and a pretty high correlation with SPX moves most of the time.
Different ways to use your capital for passive income
Many investors seek a way to get risk-free passive income during this crab market. Many crypto investors are also derisked by holding most of their assets in dollar stablecoins or cash. So we have a need for passive income but at the same time need to keep capital in stablecoins. The simplest example of the cryptocurrency analogs of bank deposits can perhaps be savings accounts on most centralized exchanges, some of them are offering pretty good APR on your stables. But what if we want to avoid centralization and manage the risks of our investments ourselves? This is where DeFi comes into play. If we ignore those few mechanics to earn income from issuing new coins (UST / USDD), we will be left with the main way to earn money — farming. By providing liquidity, we receive rewards in one form or another. But here comes the problem.
DeFi TVL is 2.87x times lower than it was during ATH.
Liquidity, and on-chain activity, are low, yields are unstable, and are also pretty low in general during bear markets.
Nansen team has published a report in which we can see that 42% of yield farmers who entered the farm on the day of its launch will exit within 24 hours, around 60% will exit within the next 48 hours, and 70% of farmers will quit the new pool by 72 hours after entering it. The reason why we can see people leaving farming pools so quickly after its launch is because of the mechanics of rewards emission — incentivization doesn’t last long, APR drops block by block because more and more people are entering the farm until yield numbers are not that attractive anymore. Users seek a better place to put their capital to work. And what are some of those places? It can be simply different options of yield farming. Still, it can also be something completely different, such as an investment strategy with a few bonus steps that give you no downside on your investment.
Delta neutral strategies
Today we will take a look at a pretty good way to earn on your investments while keeping the same $ value of your initial capital.
So what is delta neutral strategy? Coming to us from option trading markets word “delta” means a risk metric that estimates the change in a price of a derivative. It can be positive or negative. The delta index can tell the trader what hedging ratio he needs to use to become “delta neutral”. The position being delta neutral means its net change is equal to zero. A trader can open more than one position to make his overall delta equal to 0. Sounds too complicated? Here is an easy example:
Let’s say you are an investor who wants to make money but doesn’t want any risk exposure, you have $1000 in USDT and want to capitalize on that money. You notice that some let’s call it “Protocol X” gives you 76% APR on staking “Shitcoin L” — token with a $SHIL name. You understand that those APR numbers outperform everything in the current market and want to invest, but first, let’s take a look at the $SHIL price chart, let’s say the overall pattern looks like something below:
Oh no, it looks like this coin only goes down! Now you can’t be sure that you will make any money on those 76% APR because the price of a token can go down even more leveling out your entire potential annual return. In this situation buying $1000 worth of SHIL and staking it is pretty risky because this will be a long position with a pretty high potential negative delta. So what to do in this situation? We need to look for ways to compensate for risk еxposure to token depreciation. Usually, the easiest example of such compensation is a perpetual futures. You look if there are futures markets for SHIL, and you find few. Now all you need to do is open a $SHIL short position dollar value which is equal to your spot position on Protocol X.
- Let’s say 1 SHIL = $1.
- You can buy 500 coins and stake them in Protocol X.
- And the remaining $500 you can use to open a short position with 1x leverage on another exchange.
This way your delta will be equal to 0, you will not lose any money if SHIL loses in value and you will also not gain anything if SHIL will rise in value, the whole point of this strategy will be capitalizing on $500 worth of coins making a 76% annual return.
It is worth noting that this example is very simplified and does not mention all important details such as funding rate on perpetual futures, leverage that is being used, volatility of a taken asset, risk of liquidation, etc. In addition, there are many different delta neutral strategies, and not all of them consist of just two positions leveling each other.
So what do you need to do to create your own very simple delta neutral strategy just like the one in the example above? Let’s go step by step:
- In the beginning, you need to look for a liquidity pool with high returns or maybe even try to find a side protocol that will let you stake your LP tokens in order to get even more yield.
- Now you need to look for a place where you can short the right coins in order to level out your 1st position.
- Then, if you need to hedge against a liquidity pool position — you will need to do some math in order to calculate how much money you need to allocate for shorting and what leverage is better to use.
- After all steps above you will need to start making transfers/bridging/swaps/deposits/staking of your tokens.
After your delta neutral position is ready you have at least 2 positions on different platforms that you need to keep an eye on, a leveraged short position that you need to keep in mind, because if it’s getting liquidated you have to add more capital for a short position, or withdraw money out of the pool/staking and repeat all actions.
Ohh… this all sounds very complicated and exhausting, right? No wonder most people are sleeping on this kind of farming… If only there were a way to automate everything and make it more user-friendly and transparent… Well, we have good news for you! We in Ariadne protocol are planning to make this experience much more simple!
Our plans and potential for integration of delta neutral strategies in the Ariadne protocol
Currently, we are working on making the Ariadne protocol fully decentralized and transparent with an audited contract and open source code.
As you could already understand besides new farm pools we are also planning to integrate tools for participating in different delta neutral strategies in our app. Users will be able to enter and exit multiple positions inside one delta neutral strategy using stablecoin just by clicking “Deposit” and “Withdraw”. As we are moving towards making our product truly decentralized all actions including short and long positions will be performed fully on-chain.
Our goal at Ariadne is to create the ultimate DeFi hub, a tool that anyone can use to optimize and quickly perform time-consuming and sometimes complex actions, as well as save money. We are focusing on those who want to capitalize on their investments while having no downside exposure — those who want to farm with stables and those who want to use different strategies in order to extract maximum value from DeFi products but remain derisked.
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