Introduction
In traditional finance, the delta-neutral strategy is key for managing risk and ensuring steady returns by balancing various options positions. Moving into Web3, platforms like Ethena Labs apply this strategy in decentralized finance (DeFi), enhancing risk management and yield generation using blockchain technology.
Harmonix Finance takes this further by innovating the delta-neutral strategy to increase efficiency and returns while focusing on risk mitigation. Harmonix aims to push the boundaries of what's possible in the DeFi ecosystem.
“Delta neutral” and “Market neutral” in Traditional Finance (TradFi)
Delta neutral emerged in the 1970s with models like Black-Scholes, focusing on hedging options trading risks by balancing delta to create portfolios unaffected by minor market fluctuations. Market neutral gained prominence in the 1980s and 1990s among hedge funds, aiming to eliminate market exposure by balancing long and short positions across various securities.
Market neutral strategies are more widely used in TradFi, known as Hedging, particularly by hedge funds seeking stable returns irrespective of market conditions. Delta neutral strategies are specialized, mainly employed in options trading to manage specific risks.
Additionally, “market neutral” can be implemented in various ways, including:
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Pairs Trading: Buying one stock while simultaneously shorting another stock in the same sector or industry.
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Statistical Arbitrage: Using quantitative models to identify mispricings between related securities and taking offsetting long and short positions to profit from these discrepancies.
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Long/Short Equity: Taking long positions in stocks expected to outperform and short positions in stocks expected to underperform, aiming to profit from the performance spread between the two groups.
Bonus:
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“Cash and Carry”: This strategy involves buying the underlying asset of a futures contract in a spot market and carrying it for the duration of arbitrage.
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Basis Trading: Exploiting the difference (basis) between the spot price and futures price of an asset by taking positions in both markets and profiting from their convergence.
The main difference is that "delta neutral" focuses on individual asset price movements, while "market neutral" deals with overall market risk across portfolios. Both aim to reduce market risk and generate returns. In TradFi, these strategies complement each other: delta neutral techniques can enhance risk management within broader market neutral approaches, improving portfolio stability and profitability in volatile markets.
Number of hedge funds worldwide in 2023, by investment strategy
The chart shows the number of hedge funds worldwide in 2023 by investment strategy. The most common strategy is Equity (long/short) with 1,078 funds, while the least used strategy is Arbitrage with 117 funds.
In conclusion, “Market neutral” and “Delta neutral” are popular trading strategies in the financial world. However, they are more commonly used by hedge funds and professional investors than by individual traders. This raises the question, what potentials will there be if these strategies apply in the cryptocurrency market aka Web3 in general?
“Delta neutral” in Decentralized Finance
While market neutral strategies are common in traditional finance, delta neutral strategies are more prominent in decentralized finance, notably used by Ethena Labs to stabilize its stablecoin, USDe.
When a portfolio is delta-neutral, the value in USD terms remains constant regardless of market conditions. Options traders use delta-neutral strategies to profit from implied volatility or the time decay of options. These strategies are also used for hedging.
💡 An example for “Delta neutral” explanation for five years-old: Imagine you have a seesaw with Alice on one side and Bob on the other. If they weigh the same, the seesaw stays balanced. Delta neutral in finance is like this balance, where investments are arranged so that no matter if the market goes up or down, the overall value stays the same.
Back to Ethena Labs, its mechanism aims to stabilize the value of their synthetic dollar, USDe. USDe is based on a delta-neutral mechanism instead of a Collateralized Debt Position mechanism (like $DAI).
Ethena Labs uses a delta-neutral mechanism, opening non-leveraged short positions on derivatives exchanges to match user deposits, ensuring USDe stability. Users mint USDe with stablecoins (1:1 ratio), backed by ETH, with Whitelisted Market Makers using LST to maintain stability and avoid excessive short orders that could impact USDe's APY.
💡 USDe = Collateral (buy/long Spot - Staking yield) + Derivative (Short non-leverage future on Cex)
Yield can be breakdown as:
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Staked asset consensus and execution layer rewards
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Funding and basis spread earned from the delta hedging derivatives positions
By mean, sUSDe yield Is the byproduct Of Basis Trading
Ethena’s statistics:
Observing the statistics, the total supply of USDe witnessed continuous growth starting in February 2024, hitting the first peak in mid-April, and then reaching the highest position in late June with a market cap of $3.14 billion.
Ethena's delta-neutral mechanism is gaining attention from traders and venture capitalists, including DragonFly Capital and Binance Labs. USDe offers potential opportunities, high returns, and airdrops.
There are noteworthy advantages of USDe, such as potential opportunities, high returns, and the possibility of airdrops. Because Ethena's non-leverage short transactions are conducted on centralized exchanges (as shown above), this raises the main concern of the transparency of behind-the-scenes execution and the operation of delta hedging, commonly referred to as the “Onchain matter”, which leads to the question
💡 What if “delta neutral” is “onchain”?
According to Defillama, the TVL of DEXes surged in 2022, then significantly declined until late 2023, before rising again to $18.6 billion in July 2024. In contrast, the TVL of derivatives is much smaller, accounting for only one-fifth of DEXes' TVL, at $3.4 billion in July 2024, setting the 2nd peak after 2 years since 2022. The huge growth potential of decentralized applications is always undeniable.
Additionally, there are estimated global cryptocurrency ownership rates of over 560 million cryptocurrencies users worldwide in 2024.
Centralized exchanges (CEXes) often give users a sense of control over their funds, but this comes with concerns about depositing assets without transparency about how these funds are used. The collapse of FTX, a centralized exchange, highlights this risk and raises worries among cryptocurrency users about the potential misuse of their capital.
Besides on-chain implementation allows for real-time auditing and greater oversight, fostering trust among users. This transparency could attract a broader user base, including those wary of centralized entities. Additionally, integrating delta-neutral strategies on-chain can tap into the growing DeFi ecosystem, unlocking new opportunities for yield generation and risk management.
In summary, bringing "delta neutral" strategies on-chain can create a more transparent, secure, and robust trading environment, significantly enhancing their appeal and effectiveness within the evolving DeFi landscape.
Harmonix Finance & On-chain “Delta neutral”
Harmonix Finance - Efficient hedge fund on-chain derivatives pools (Live on Ethereum/Arbitrum/Base), that brings 100% transparent, balanced risk-reward, and especially maximizing returns with automated vault strategies. This diagram below shows the general concept of how Harmonix’s “delta neutral” mechanism works. Our strategy is more like Cash and Carry.
It works as follows: users deposit their money into Harmonix's delta neutral vaults, and the smart contract immediately splits the assets into a 50%-50% ratio. 50% of the stablecoin is converted into ETH for the staking strategy, and this 50% is transferred to Dex Liquidity pools to provide liquidity and to earn yield. The remaining 50% is sent to Dex perpetual/derivatives exchanges and short non-leverage the USDC (USDC: is the collateral asset, this means if you have 10$ of capital, Harmonix short exactly 10$); and ETH as the underlying asset for this action. Everything are under the control of our Risk Model.
🧙♂️ Compound Yield = Liquid staking yield + Funding fees earned from Short non-leverage position
Harmonix current “delta neutral” vault products including: core “delta neutral” vault, 2 restaking vaults, and BSX vault (live on Base).
Why is Harmonix’s model sustainable?
Harmonix brings "Delta neutral" on-chain, exemplifying transparency in every transaction. Our approach ensures that collateral assets are shorted on decentralized exchanges (DEXes), guaranteeing transparent execution of transactions. Additionally, our algorithms continuously seek out favorable funding rates to maximize compound yields for our vaults as well as access to various types of point from new DeFi protocols for our users, with Aevo currently being utilized for this purpose.
Users benefit from rapid withdrawal times, as assets from our "Delta neutral" vaults can be withdrawn within just 1 to 4 hours. This quick and flexible process underscores our commitment to providing a seamless and efficient user experience.
Last but not least, by employing the "cash and carry" model, which is a delta-neutral strategy, we aim to provide superior risk management for users' deposited assets. This approach allows us to minimize exposure to market volatility, ensuring that the value of the assets remains stable despite fluctuations in market conditions. By hedging positions effectively, we follow the 1st investment principle as minimizing loss while still capturing favorable funding rates. This robust risk management framework is designed to give users peace of mind, knowing their investments are safeguarded against unforeseen market movements.
TL;DR: The highlighted terms for Harmonix Finance:
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On-chain & Transparency
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Speed
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Flexibility & Diversity
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Superior risk management
Comparison between Harmonix Finance and other protocols
This analysis comparison highlights the unique strengths of EtherFi, Ethena, and Harmonix Finance, focusing on their supported assets, strategies, APY (Annual Percentage Yield), and withdrawal times. EtherFi supports ETH and stablecoins such as USDC, USDT, and DAI, utilizing an ETH yield market-neutral strategy with an APY range of 2% to 15%. Ethena, on the other hand, supports stablecoins only, employing a delta-neutral strategy for minting USDe and offering an APY of approximately 11%, influenced by CEX funding rates and market fluctuations. Harmonix Finance stands out by supporting a variety of assets including LRT ETH, ETH, and stablecoins, and by implementing multiple strategies like delta-neutral, option wheel, and restaking. The core mechanism revolves around delta-neutral tactics, applied across various vaults to enhance returns, resulting in a competitive APY ranging from 20% to 120%.
In terms of withdrawal times, EtherFi requires a 72-hour period, while Ethena has a 7-day withdrawal period for USDe. Harmonix Finance features a swift withdrawal time of 1 to 4 hours for its delta-neutral vaults, thanks to efficient management and optimization strategies that adapt quickly to market opportunities to maximize yield. This comprehensive comparison showcases the distinct attributes and benefits of each protocol, allowing potential users to appreciate the unique offerings of EtherFi, Ethena, and Harmonix Finance without positioning them directly against one another.
Conclusion
In conclusion, "Market neutral" and "Delta neutral" strategies, long popular in traditional finance, are now gaining traction in DeFi, as seen with Ethena Labs. Harmonix Finance is committed to advancing these strategies to stabilize and enhance the DeFi landscape.
Harmonix Finance aims to redefine transparency, efficiency, and risk management in DeFi with on-chain delta-neutral strategies. We ensure transparent transactions, secure collateral management, and flexible fund access, maximizing returns while offering superior risk management.
Join us on this journey. Whether you're an individual trader or an institutional investor, Harmonix Finance provides the tools and expertise you need. Explore our delta-neutral vaults, experience automated strategies, and be part of a financial revolution prioritizing transparency and security!
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Website: https://harmonix.fi
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Discord: https://discord.harmonix.fi