Hello, digital finance 'Sherlocks'!
We talked about the over-collateralization of USDf, the addition of RWA, and the yield generation of sUSDf. However, these wonderful mechanisms all require a behind-the-scenes **'protocol wizard'** to ensure their stable operation and profit sources. This wizard is the 'Delta-Neutral Trading Strategies'.
In traditional finance, this is a high-level strategy commonly used by professional hedge funds; in Falcon Finance, it is used to manage collateral risk and generate yield buffers, which is a key technology to ensure the 'no liquidation' commitment.
Triangular neutrality is 'the protocol's respirator,' not just a simple investment tool.
The purpose of Falcon Finance adopting the triangular neutral strategy is not to pursue extreme excess returns (Alpha), but to pursue stable returns (Beta) under risk neutrality. It is not for speculation, but for hedging, stabilization, and providing a buffer, making it the protocol's 'respirator.'
The value of the triangular neutral strategy (Mermaid Graph)
The core of this strategy lies in simultaneously buying and selling related assets, making the overall price movement (Delta) of the asset portfolio close to zero, thus achieving hedging with minimal net value change of the asset portfolio during price increases or decreases.
1. Risk hedging process (Mermaid Graph)
Interpretation: When users collateralize highly volatile assets like BTC, the system generates a long exposure. The protocol hedges the overall risk exposure by establishing corresponding short positions in the derivatives market (such as perpetual contracts or futures). Thus, regardless of BTC price fluctuations, the net dollar value of the collateral experiences minimal volatility.
2. Stability of income sources
Through hedging, the protocol not only reduces risk but also gains stable sources of income:
Perpetual contract funding rate: In the crypto market, the funding rate for perpetual contracts is positive most of the time, meaning that shorts can continuously earn the fees paid by longs. As the protocol needs to hold short positions for hedging, this becomes a continuous and low-risk source of income.
Arbitrage opportunities: The execution of the strategy also simultaneously captures the small price differences (arbitrage profits) between different markets and chains.
These stable returns are used to fill the sUSDf yield buffer mentioned in Part 3, further enhancing the protocol's risk resistance capability.
Conclusion: Stay calm in volatility
The triangular neutral strategy is Falcon Finance's core weapon for maintaining calm. It enables the protocol to provide users with **'stable, liquidation-free'** liquidity in a wildly volatile market.
With the support of this strategy, market fluctuations are merely the 'noise' from which the protocol derives funding rates and arbitrage profits, while your collateral enjoys the stability brought by risk hedging!
