Delta Neutral Farming

Today we’ll go back to the basics with DeFi 1.0! As you guys may already know, DEXes are possible because they allow users to pool their liquidity together for others to carry out a swap. The liquidity providers draws a small transaction fee as a cut for providing liquidity. However, these fees need to be low to incentivize people from carrying out these swaps (what the damn hell Uniswap/Sushiswap) but that also leaves the liquidity providers with less revenue that may not even cover the impermanent losses experienced.

To overcome such a situation, DEXes like PancakeSwap, Raydium, TraderJoe and many others provide this thing called yield farming. Liquidity providers will stake their LP tokens to get a higher yield in the form of the DEX’s native token like CAKE, RAY and JOE. While it is cool to know that you are getting a much higher yield than just simply providing liquidity, this increased in yield comes in the form of the tokens that may not be the liquidity pair you’re providing. For most people, to realize this additional yield as profit, they swap off that token to something they rather hold or a stable coin like USDC/USDT. This leads to a long lasting selling pressure of the token which can harm its value. This can be seen in most of the DEX’s native token price like CAKE, UNI, SUSHI (I am excluding JOE and RAY as they are relatively younger) where they have been severely underperforming against the general market.

What I mean by underperform is the value of the said token. You can say that the dollar value of UNI, CAKE or SUSHI had been somewhat the same with some ups and downs like all cryptocurrency, but if you pair it against their native blockchain like UNI/ETH and CAKE/BNB, you will realize that since the market recovered from the May sell-off in late August, these coins are lagging behind severely.

If you’re a defi degen like me, you’ll probably know about Tulip Protocol. They are a yield aggregator, auto-compounder and borrowing/lending protocol built on the Solana chain. What makes it different is that because it is a lending/borrowing protocol built on top of a yield aggregator, people can create a leveraged position while farming. Users that do not want to deal with impermanent losses and whatnot can choose to just lend out their assets and get a decent return on it. Other users can then borrow that asset and create a leveraged farming position.

For example, you want to enter the RAY-USDC farm. Providing liquidity on Raydium yields you an APR of 76.51%. Doing it on Tulip will yield you 100.94% due to their auto-compounding feature but if you really want to crank it up, you can leverage it up to a maximum of 3x and achieve a 585.07% APY. How this leveraged farming work is basically the same as how you will do it in normal yield farming but the protocol allows you to borrow assets to increase your position size.

When you borrow an asset, in the short term, you are essentially short on that asset. So in the case of the RAY-USDC position, when you open a 2x leverage position, you can choose to borrow RAY or USDC to achieve this position. In the case when you borrow RAY, you are basically shorting RAY in the short term. An additional thing to note with opening a leveraged position is the risk of liquidation. In the case of a 2x leverage, you are basically borrowing an amount that is equal to the asset you provided which leaves you with a 50% loan-to-value ratio. A liquidation occurs when the loan-to-value ratio exceeds 85%. If you are familiar with how impermanent loss works, you’ll realize that you need the price of RAY to decrease substantially to have the loan-to-value ratio increase an additional 35%. However, even if you do not get liquidated, you’re still incurring a large loss due to the larger positional size.

Here comes the fun part, with Tulip, when you are opening a position, you can choose which asset you are borrowing. This means that you can essentially open two positions, one shorting and one longing the same asset. This creates what is known as delta neutral position. The exposure to the price action of the asset you are borrowing is reduced drastically (you still need to adjust them accordingly as other variables change).

Congratulations, you are now reaping the benefits of the insanely high APY that leveraged farming can offer with little to no downside!

You’re probably wondering that the math behind achieving this magical feat is going to be tedious and you are not wrong but thankfully you can head over to Tulip’s documentation page and look at the resources available. An excel spreadsheet is made available that will guide you through how this can be achieved. It even teaches you how you can magnify your rewards in a bull/bear market. If you’re still way too lazy to punch some numbers into a simple excel sheet, you can check out Delta One protocol. They are currently still in beta and have yet to officially launch but they aim to do all the things I’ve described so far automatically for users. All you have to do is provide USDC.

I am personally very excited for their launch so that I can start being lazy and be rewarded!

Edit: It was after I published this story and I realized that there is already a working psuedo delta neutral farming strategy provided by Francium using the whETH-USDC pool from Raydium and Orca!

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store