Delta-Neutral Stability

What does "delta" mean?

"Delta" denotes the rate at which the price of a derivative reacts to fluctuations in the price of its underlying asset.

For instance, USDX.money initially assumes a positive delta of 1 BTC when users deposit an equivalent amount of BTC. Consequently, the USD value (and thereby, the USDX backing value) of the deposited BTC will fluctuate directly in tandem with the spot price movements of BTC.

Further reading: Introduction to Option Greeks

Understanding Delta-Neutral Stability

A portfolio is said to be "delta-neutral" when its delta equals zero, indicating no sensitivity to shifts in the asset's underlying price.

Building on the earlier example, USDX.money starts with a positive delta due to a user's BTC deposit. To achieve a delta of zero, USDX.money could hedge this by short-selling a perpetual contract equivalent to the BTC deposit. This maneuver renders the delta of USDX.money's holdings neutral.

In simpler terms, being delta-neutral ensures the portfolio's USD value is impervious to market volatility (i.e., irrespective of any BTC spot price movements). Even if the BTC price were to soar and then plummet dramatically within seconds, the portfolio's USD valuation would stay stable, save for brief discrepancies between spot prices and derivative markets. This stability comes from the gains on the BTC price rise being exactly negated by losses on a matching short perpetual position.

USDX.money conducts trades across various exchanges without utilizing leverage, maintaining delta neutrality by ensuring that short positions in perpetual contracts match the size of the underlying assets.

It's worth mentioning that maintaining a delta-neutral position is a common strategy among institutional market makers to circumvent the risks associated with price volatility, a practice well-entrenched in both the realms of traditional finance and cryptocurrency markets.