Possible to successfully Delta Hedge @Uniswap V3 concentrated liquidity pools? YES.
It's a DOUBLE EDGED sword if not properly managed, though!
I will go over the pros and cons of how Delta Hedging can both help and HURT your LP portfolio and when to implement this strategy.
In a previous thread I mention that APR's in Uniswap are dwindling for Liquidity Providers.
twitter.com/FLOAT_LOCKER/status/1663107940113604610?s=20
Markets are getting leaner. APR's drop as more competition enters. Sloppy market participants are getting weeded out. Sloppy mechanics become the downfall of the unprepared.
Delta hedging to create neutral LP's primarily relies on yield for profit making it more difficult.
The drawbacks of delta hedging:
- Detrimental for long term. Especially on chain hedging. Collateral does NOT earn yield
- Losses may quickly compound due to impermanent loss (IL) and mismanagement of risk.
- Complex strategy that requires precise planning (easy to mess up)
The benefits:
- Provides a way to stay in the market earning yields during uncertain times
- Reduces portfolio volatility
- Hedging what you only need is a better approach for longevity
With yields dwindling in Uniswap, it's becoming more prudent to structure liquidity pools WITHOUT a hedge to maximize yield while mitigating risk.
Once the limits of pool structuring and rebalancing have been met, delta hedging becomes the next step to continue generating yields
Factors such as slippage, transaction fees, interest paid for borrowing must all be considered. Is it worth the trade off? Have you maximized the efforts in using defensive pools without hedging (ie USDC heavy pools vs $ETH)?
Delta hedged LP's also have negative exposure to price up AND down.
- Price moves up, you get more short
- Price moves down, you get more long
Your P&L will be negative. This must be built in to your trade plan. When do you manage? How do you rebalance? Very important.
Most fail to realize a liquidity provider takes the OTHER side of a trade the majority do NOT want. If you're a contrarian by nature, this should ring true.
It requires stepping out of a traders mindset.......while also thinking what a trader may do. Then strategize around it.
A project worth following is @0xOrangeFinance - they are working on creating a delta hedged vault that utilizes concentrated liquidity pools and lending/borrowing to create a hedge when necessary. Worth keeping tabs on for sure.
If you're interested in deep diving and interested in learning how to generate consistent yield in UNIV3 concentrated liquidity pools, join my Discord for FREE! Our community is focused on concentrated liquidity strategies.
discord.gg/uBqJ8gasFX
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