Delta-Neutral Yield Strategies

A delta-neutral strategy is an approach designed to mitigate the impact of price movements in the underlying asset, aiming to achieve a position where the portfolio's value remains relatively unchanged regardless of the market's directional movements. This strategy involves balancing positive and negative deltas, so that the overall delta of the assets in question totals zero.

Delta-neutral strategies are particularly valuable and effective in crypto assets markets. Given that more capitalized crypto assets, like Bitcoin, tend to appreciate over time, these strategies allow traders to capture attractive yields while minimizing risks associated with price volatility.

Arcana Delta-neutral Yield Strategies

Arcana employs multiple delta-neutral strategies to tokenize the yield captured in the form of arcUSD. These strategies are carefully selected and tailored to leverage the unique opportunities within the crypto markets while aiming to minimize downside risks.

Cash and Carry Trade:

This classic strategy involves buying (going long on) a token like Bitcoin in the spot market while simultaneously selling (going short on) corresponding Bitcoin perpetual futures contracts. The goal is to exploit the price discrepancies between the spot and futures markets, collecting the yield from the perpetual funding rate. While this is a popular strategy for major tokens like BTC and ETH, it can be employed on more volatile assets as well.

Liquidity Pool Hedging:

Building on the principles of the cash and carry trade, this strategy utilizes a portion of the assets to participate in large, established, and battle-tested DeFi liquidity pools to collect LP yield, while another portion of the assets is used as margin to short the assets in these liquidity pools, achieving a delta-neutral position.

Initially, Arcana will focus solely on the Cash & Carry trade with Bitcoin. At some point after launch, the protocol will implement Liquidity Pool Hedging. Other delta-neutral strategies utilizing volatile assets as well as Loan Liquidation strategies, are currently under study and may be added to the protocol's strategy suite in the future.

Funding Onchain Strategies

At times, Arcana may remove ETH collateral from the Binance Cash and Carry trade. These funds will be used for onchain strategies, including delta-neutral farming activities such as LP farming, or deposited into a liquid-staking contract for incremental yield.

In these situations, the short position which generates the funding rates passed along to arcUSD becomes leveraged. Because the short is not fully collateralized, it can be liquidated if the price of ETH were to rapidly appreciate.

Our evaluation criteria on what we determine to be a "safe" amount of leverage is a simple threshold in daily ETH appreciation. We feel comfortable removing only the amount of collateral which would require a daily increase of 100% in the price of ETH to liquidate our position. ETH would need to double in price over the course of 24 hours to trigger any loss of funds. This would need to be a market-wide move, not an isolated or temporary event on Binance. Based on ETH's historical performance, we believe this scenario is highly unlikely and view our leveraged position as "low risk" given these parameters.

If this type of rally were to occur, we would start covering our CEX position, trading onchain positions back into ETH and moving the proceeds into Binance to increase collateral. This type of rally would also fuel rampant speculation, driving up funding rates. Being long spot, short futures might result in a temporary loss, which would be recouped within 24 hours from funding rates with the potential to earn more when the market consolidated.

Given the risk-management approaches shared above, we can currently remove up to 48% of ETH collateral to use in other delta-neutral strategies. This allows Arcana to consistently outperform competitive products offering users yield derived from similar sources with similar amounts of risk.

The Mark Price is a mechanism used in crypto futures trading on Binance to ensure fair and accurate pricing of futures contracts.

On Binance Futures, a contract's Mark Price is determined by considering several factors such as the futures contract's Last Price, the bid1 and ask1 series from the order book, the funding rate, and a composite average of the underlying asset's spot price on major crypto exchanges.