Delta neutral position
The article discusses the frenzy surrounding Loot and provides an overview of what is happening in the Loot ecosystem. It also mentions the UXD Protocol and its algorithm. The UXD Protocol utilizes a mechanism called Delta Neutral. To illustrate this mechanism, let's consider the process of creating a $100 worth of stablecoin. First, the user deposits $100 worth of BTC into the UXD Protocol contract. In return, the UXD Protocol issues 100 UXD stablecoins.
Next, the UXD Protocol transfers the deposited BTC to a derivative DEX and takes a short position worth $100 (Delta Neutral) to hedge the position. This ensures that any price fluctuations in BTC are offset by the hedging position, resulting in a break-even profit/loss. When the user wants to redeem the stablecoin, they send back the 100 UXD to the UXD Protocol contract (Vault), and in return, they receive $100 worth of BTC. This process involves sending the UXD to the contract, resolving the Delta Neutral position on the derivative DEX, burning the UXD, and unlocking the equivalent amount of BTC.
The article introduces the stablecoin UXD, which is backed by a Delta Neutral position. This position ensures that the PnL (profit and loss) is not affected by fluctuations in BTC prices and allows for earning funding rates in the futures market. For example, by holding 1 BTC in spot and shorting 1 BTC in perpetual swaps, one can earn funding rates. Historical data shows that BTC funding rates have mostly been positive, and simulations of profit and loss from executing the Delta Neutral strategy since May 2019 are shown below: https://gyazo.com/f14dd44baf60db0246f3ab6b6b4ace55