The term “Delta neutral” generally describes a strategy that involves a long and a short position, where a combined exposure in both, results in a market neutral position, i.e. you turn a trend (bullish or bearish) into a calm sea. Therefore, the Delta measures the directional variation of a position (-1, 0, +1), so Delta means change and these Deltas can be:
Positive Delta: A position with a Delta of 0.5 in any cryptocurrency will generate half a dollar for every dollar that its price increases.
Negative Delta: A position with a Delta of -0.5 in any cryptocurrency will generate half a dollar for every dollar that its price falls.
Thanks to being able to use this strategy, you start working with a certain advantage in the market. Your trading does not react to small changes in the price of the underlying asset, therefore, it does not get you into trouble (which can be punctual) that can affect your income statement. If we transfer this to my field of work, “DeFi”, the Delta-Neutral strategy allows me to abstain from the noise to focus only on collecting profits, which is why I put my capital at risk for a certain period of time. To put it more simply, if you manage this type of strategy well, you can literally turn a liquidity pool into an ATM, since the long position is assumed when you open the pool and the short position can be executed against the volatile asset in an exchange, usually in the spot. You can automate it and allow yourself the luxury of doing it with a little leverage while the pool is running (up to X5), since the information on how to execute those shorts is obtained with the parameters of the pool configuration.
You can always explore doing this delta with derivatives in decentralized systems, perpetual futures or by buying or selling options, here each master has his way of acting. This is undoubtedly one of the greatest direct benefits of an open source ecosystem “allowing to build as they are created structured products, more or less complex, ready to be executed without having to manually carry out the operations, something that until now had been a virtue only within the reach of traditional finance”. This point is very important, given that we must always start with the premise that it is impossible to beat the market consistently over time, without assuming great risks, because asset prices reflect all available information, therefore, only they will react again to new news (Efficient Market Hypothesis) .
Protocols such as Euler Labs (https://www.euler.finance/) allow us to incorporate short positions in our DeFi strategies, making it a very optimal protocol for working Uniswap V3 pools (although the concentrated liquidity in Uniswap v3 changes a bit the delta dynamics itself), where if one of the tokens enters a downtrend it does not affect the net return obtained, nor does it force us to withdraw the pool liquidity to protect the invested capital. In Euler we can execute a short sale of an asset or borrow a token instead of buying it without impacting the price of that asset and acting as leverage.
Therefore, to establish a delta neutral strategy, simply borrow a volatile token equal to the amount invested in the pool and change it (sell it) at that moment to USDC, USDT or DAI, thus hedging the position while the price turns in our favor. Undoubtedly this type of protocols not only helps to unlock fears , make the environment more friendly and go eliminating the risk due to price volatility, but also benefits that pairs with tokens that are not bullish, can receive liquidity and activate them in the same way as it is done now with more bullish pairs, improving the efficiency of the platform by use.
Make all your moves in one, i.e. you can deposit and order in the same transaction, therefore, you only pay one fee.
All non-native network assets have a high oracle risk, don’t forget that.
Please use their excellent revoke permissions tab once you are done trading with the platform, don’t leave the taps open before you go to sleep.
Read his blog for a better understanding of this protocol.