You can generate passive income using your cryptocurrencies without exposing yourself to market price fluctuations. This is the principle of the so-called “delta-neutral” strategies. We will see in this article how to implement this type of strategy with a concrete example, after having seen what it consists of.
The principle of a delta-neutral strategy
Delta (Δ) is the measure of the change in the price of an asset. The purpose of a “delta-neutral” strategy is to neutralize the effect of this variation by obtaining a yield. In other words, “delta-neutral” means that the change in the price of the asset used for the strategy has no impact on your performance.
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Setting up a neutral delta strategy on Mirror (Earth)
Presentation of the Mirror protocol
Mirror is a DeFi protocol on the Terra blockchain that allows the creation of synthetic assets called Mirror resources (mAsset). The masses mimic the pricing behavior of real-world assets (Apple stocks, Coca Cola, etc.). This allows users to gain exposure to the price changes of these assets in a decentralized way.
We will not go into the general operation of this protocol here, but we will keep this: to keep the price of mAsets close to that of reality (peg), Mirror needs users to bet on these mAsets. To incentivize them to do so, Mirror offers them its Governance Token (MIR) as a reward. The yields offered are visible in the “Short” column (2) of the “Farm” tab (1).
Presentation of the strategy
The idea of this delta-neutral strategy is to exploit the yields offered for the “Short Farm” without being exposed to changes in the price of the mAsset used (ie without actually betting on the downside).
The following diagram summarizes how we will achieve this. You don’t need to go through Anchor Protocol to be Delta neutral. However, we will still integrate it into our strategy to increase returns.
- Our starting capital is divided into 3 parts.
- We deposit 2/3 on Anchor to receive aUST.
- Those aUST are deposited on Mirror to borrow at Well and put it in the “Short Farm”
- 1/3 of our capital is used to purchase the same Well.
We are thus in a “delta-neutral” situation. In fact, we immediately buy the same amount of mAsset that we borrow. We will then be able to repay our debt at the price it cost us!
If we do not fear the change in the price of the mAsset for our return, we still remain exposed to a number of significant risks:
- Liquidation risk (see our article on borrow): we will take a guarantee ratio of 200% here to leave us a safety margin. In fact, the change in the price of Well it has no impact on the return of our strategy but it does on our debt: if the price of the Well borrowed increases too much we can be liquidated. The maximum price increase will be calculated based on the Well borrowed and time spent (the value of our collateral increasing over time – 20% APY from Anchor).
- The risks of hacks and smart contracts : we are exposed on the Anchor and Mirror protocols
- The risk of losing the UST peg : If the UST stablecoin is no longer worth $ 1, we can be liquidated faster than expected
- The Oracle risk : the oracle may not provide the “true” external price of the underlying asset. This can lead to unexpected liquidation.
Implementation of the strategy
- Have installed a compatible Terra wallet (Terra Station Wallet, Ledger, Wallet Connect)
- Have UST on his wallet
Deposit on Anchor
We will start here with $ 90 capital in UST (plan a safety margin to pay the transaction costs and manage the premium and price changes while implementing the strategy). We will start by depositing 2/3 of it (ie $ 60) on Anchor by going to “Earn” (1) then “Deposit” (2).
After entering the amount, we deposit them on the platform.
In return, Anchor gives us aUST. We can see our deposit appear on the platform.
Using the mirror
We will use these aUST go for a short time Well on Mirror. To choose ours Well we will review the return history in the last 30 days to choose the most profitable (of course you can rely on other criteria)
We will choose here shortly MOM which returned 22.86% in the last 30 days. To do this we go to the “Farm” tab (1) and choose to short-circuit MOM (2).
We choose theaUST as collateral (1) and deposit the ones we have in our portfolio with a collateral ratio of 200% (2). We see that the platform will take 1.5% of the amount ” coined »When the position is closed (to be taken into account in our profitability calculations). Number of MOM short is 0.29 (4).
By going to the “My Page” tab, we can see our position appear. We will have to buy back the number of immediately MOM that we borrowed.
There is a price difference in the MOM borrowed and bought and sold for premium (see our article on borrow). Let’s go to the “Trade” tab and select MOM against SETTING UP then “Buy”.
Returning to the “My Page” tab (1) we see that we have actually purchased the same number of MOM (2) compared to what we have borrowed (3) and with which we are rewarded FOR ME up to 19.27% (4).
Our neutral delta strategy is in place. If we go to Anchor we will no longer see a deposit because the aUST that we had received were redeposited on Mirror. To recover ours SETTING UP you will need to retrieve the aUST on the mirror.
During this period we will have to ensure that the price of mAMD does not increase in such a way as to allow us to liquidate (minimum guarantee ratio of 150%).
We can also see from the previous screenshot that in 2 weeks we will be able to request 34.45 UST which we can redeposit on Anchor to gain more interest or reuse it for something else.
Another strategy is possible to potentially increase the return on your position. You can deposit the recovered FSOs into the liquidity pool with the MOM you own (in the “Long Farm” tab). However, this strategy is beyond the scope of this article because it is no longer neutral with respect to the delta. In this case, you will actually be subject to intermittent losses (see our article: Become an LP Provider).
In our article “Using a Performance Optimizer” we have seen that Aperture Finance allows you to set this type of strategy automatically. The guarantee ratio is also automatically adjusted so that it is not liquidated.
Delta-neutral strategies are particularly interesting when the market is undecided. They allow you to do so generate passive income without having to constantly follow the evolution of prices.
If you decide to implement such a strategy, take some time to do so assess the risks you are exposed to.
Other methods are possible to create “delta-neutral” strategies. We will see in a future article how to set the positions ” neutral pseudo-delta ” on the swimming pools liquidity, or how to take advantage of their return without exposing yourself to price changes and therefore to intermittent losses.
If you are looking for other ways to generate passive income, you can also check out our previous articles on borrow, staking Where this loan.
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