Delta Neutral
YieldFu employs an innovative approach to maximize returns while minimizing directional market risk. A portion of the bonding revenues is used to create delta neutral positions on Ethereum (ETH), allowing the protocol to generate additional yield through funding rates.
What is a Delta Neutral Position?
A delta neutral position is a strategy where the overall portfolio is hedged against directional price movements. In our case, we achieve this by simultaneously going long and short on ETH in equal amounts.
[Visual suggestion: Diagram showing a balance scale with "Long ETH" on one side and "Short ETH" on the other, perfectly balanced]
How YieldFu Implements the Strategy
Allocation of Bonding Revenues: A predetermined portion of the bonding revenues is set aside for this strategy.
Opening Positions:
Long Position: We use half of the allocated funds to buy ETH spot or go long on ETH perpetual futures.
Short Position: Simultaneously, we use the other half to short an equivalent amount of ETH using perpetual futures.
Maintaining Delta Neutrality: The positions are continuously monitored and rebalanced to ensure they remain delta neutral, regardless of ETH price movements.
Capturing Funding Rates
The key to generating yield in this strategy lies in the funding rates of perpetual futures markets.
Funding rates are periodic payments between long and short traders in perpetual futures markets.
These rates can be positive or negative, depending on market sentiment.
By holding both long and short positions, YieldFu can capture these funding rates, regardless of their direction.
Benefits of the Strategy
Risk Mitigation: The delta neutral position protects the allocated funds from ETH price volatility.
Consistent Yield: Funding rates provide a relatively stable source of yield, independent of market direction.
Capital Efficiency: This strategy allows YieldFu to put bonding revenues to work immediately, rather than letting them sit idle.
Example Scenario
Let's walk through a simplified example:
YieldFu allocates 100 ETH worth of bonding revenues to this strategy.
50 ETH is used to open a long position, and 50 ETH to open a short position.
Over a week, the funding rate averages 0.01% per 8 hours in favor of short positions.
After a week, regardless of ETH price movements, YieldFu would have earned approximately 0.21 ETH in funding rates.
YieldFu actively manages these risks through careful position sizing, regular rebalancing, and using reputable platforms with deep liquidity.
By implementing this delta neutral strategy, YieldFu is able to generate additional yield from bonding revenues, further enhancing the overall returns for the protocol and its participants.
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