A Deep-Dive for Overnight’s Delta-Neutral Strategy recently launched on Optimism
Overnight employs its in-house Delta-Neutral strategies to offer its users hedged Crypto-to-Stable LP positions. In doing so, such strategies negate exposure to market volatility as they incorporate borrowing of the volatile token — through a stringently maintained health factor — and the borrowed token is used to LP; the subsequent yields from the LPs are passed on to users on a daily horizon.
The protocol has launched several Delta-Neutral hedged strategies in the past and each utilizing a respective strategy. However, the strategies have been mostly limited to Uni v2 and its derivatives (Velodrome, Dystopia, etc) and the recently launched strategy on Optimism utilizes the capital efficiency of Uni v3 — offering concentrated liquidity.
Delta Neutral Strategies: What makes it Unique
Since its inception, Overnight’s Delta-Neutral Strategies boast of offering 10–25% APY on USDC for users of delta-neutral strategies for over 4 months. Bear or bull, the strategy effectively negates exposure to market volatility through the magic of delta-neutral.
The term ‘Delta-Neutral’ in this case refers to a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset. Hedging in this case involves borrowing ETH with USDC as collateral on the Money Market: AAVE which is then used in the wETH/USDC pool via Arrakis.
We’re seeing an overall market down surge having the effect of radically reducing overall portfolio values in a bear market. Users reluctant to expose themselves to market volatility but simultaneously willing to benefit from Yield-Farming rewards are placed in a dilemma — whether to partake in such an activity and risk exposure or lose out on such rewards.
This dilemma is effectively solved by Overnight’s use of Delta-Neutral Strategies; an opposite position in the volatile token (ETH) is taken to counter said market exposure within an LP position. By removing its inherent drawbacks, the strategy appeals to the more risk-averse investors and enables them to enjoy consistent yields paid out in stablecoins.
The Delta-Neutral strategy utilizes an AMM (Uni v3), a Lending Protocol (AAVE), and a liquidity management solution (Arrakis). This is a perfect trio with each complimenting the other.
AAVE enables users to take out collateralized loans, Uniswap v3 offers concentrated liquidity with tight ranges, and Arrakis enables users to better manage their Uni v3 positions.
Once a position is constructed with the use of said protocols, Overnight actively manages this position in order to minimize exposure to Impermanent Losses and to provide users with consistent and positive returns on their stablecoins.
In concrete terms, the Night Over Arrakis (WETH/USDC) Vault’s mechanisms are illustrated as follows:
1. A user deposits USDC into the strategy and receives ETS Night Over Arrakis as proof of deposit
2. A portion of the USDC is provided as collateral on AAVE and ETH is borrowed against a Health Factor of 1.2x
3. The remaining USDC & the borrowed ETH are used to make LPs via Uni v3
4. The Uni v3 LP positions (NFTs) are deposited on Arrakis
5. Arrakis rebalances the LP position to avoid getting ‘stopped-out’ of the liquidity range
6. Overnight rebalances and stringently maintains the 1.2x Health Factor to deter Impermanent Losses as they arise
The payout methodology is as follows:
1. Fees & OP tokens as rewards are harvested and swapped for USDC
2. The strategy does a payout in ETS tokens & auto-compounds your holdings
3. ETS is 100% liquid: at any moment in time users can redeem ETS back to USDC 1:1
The structure of the ETS is described in the following image:
Arrakis Liquidity Pool on Velodrome
Additionally, to make the ETS more accessible, Overnight has launched a self-bribing USD+/ETS v3 Arrakis Pool on Velodrome. Such a liquidity pool boasts of both underlying assets being Yield-Bearing and the yields from the two assets are used to bribe veVELO holders (governance token holders) in favor of voting for the USD+/ETS v3 Arrakis Pool. This means that the pool adopts an ‘anti-dilution’ methodology whereby a surge of liquidity entering into the pool doesn’t instantaneously dilute the APRs; an increase in TVL corresponds to more yields and hence, equates to greater bribes to sustain emissions. In short, the TVL complements APRs by indirectly accruing benefits to LPs.
This pool is unlike no other and boasts several innovations: concentrated liquidity, delta-neutral, and rigorous asset management among others.
In conjunction with its self-bribing infrastructure, the pool is offering a lucrative 30–40% APR — this is essentially yields on stablecoins.
A Trio for the Better: How to get started
Users looking to get started with Overnight’s Arrakis strategy can buy the token via Velodrome as explained in the image below. Simply acquire USD+ (through Overnight’s dApp or on Velodrome itself) and then swap for ‘ETS v3 Arks.’ Users looking to amplify their rewards from the ETS can partake in the USD+/ETS v3 Arrakis Stable Pool and enjoy additional yields.