Delta Neutral Position
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Mechanism
For example, if you want to create $100 worth of stablecoin, the following process will occur:
The user deposits $100 worth of BTC into the UXD protocol contract
The UXD protocol issues $100 worth of stablecoin (100 UXD)
The UXD protocol transfers the deposited BTC to a derivative DEX and takes a $100 short position (creating a delta-neutral position to hedge)
This offsets any gains or losses from the BTC price going up or down, resulting in a profit or loss of 0.
To return the stablecoin, send 100 UXD to the UXD Protocol contract (Vault) to retrieve $100 worth of BTC.
Send UXD to the contract
The delta-neutral position held on the derivative DEX is dissolved
The UXD protocol burns UXD and unlocks the same amount of BTC
This is the process.
Delta-neutral is a trading strategy that creates a position that is not affected by changes in the price of BTC and earns funding rates in the futures market. For example, by holding one physical BTC and shorting one perpetual swap BTC, you can earn a funding rate. Statistically, the FR of BTC has been positive for most periods, and the simulation of profit and loss when executing the delta-neutral strategy from May 2019 is as follows:
https://gyazo.com/f14dd44baf60db0246f3ab6b6b4ace55