How to deploy delta-neutral liquidity in Uniswap — or why Euler Finance is a game changer for liquidity providers

  • Providing liquidity in Uniswap is limited to taking directional positions with “positive delta.” This means LPs will not benefit from participating in bearish token pools.
  • Protocols like Euler Finance allows users to incorporate short positions into their strategies.
  • Combining a short position with Uniswap v2 or v3 LP tokens unlocks neutral and bearish strategies for liquidity providers (LPs).
  • It’s a Win-Win-Win scenario:
    1. LPs can deploy directionally strategic positions on Uniswap.
    2. Uniswap traders benefit from evenly distributed liquidity in all pools.
    3. Depositors earn more yields on Euler due to the Uni LP borrowing use case.
  • Tools/calculators in this post:
    -Uni v2 LP hedging:
    https://www.desmos.com/calculator/pkscywsiiw
    -Uni v3 LP hedging:
    https://www.desmos.com/calculator/669zg1rmvb

Bearish Assets and Uniswap LPs

Euler Finance Basics

  • Assets with the lowest risk will be in the collateral-tier. Multiple assets in the cross-tier can be borrowed at the same time, and only these assets can be used as collateral. Assets: WETH, WBTC, USDC, DAI, DeFi blue chips.
  • Slightly safer assets will be in the cross-tier. Multiple assets in the cross-tier can be borrowed at the same time, but these assets cannot be used as collateral either. Assets: medium-to-high market cap tokens with established use cases but uncertain long-term stability prospects.
  • The riskiest assets will be in the isolation-tier. Only a single asset in the isolation-tier can be borrowed at a time and these assets cannot be used as collateral. Assets: All other assets, which are in the isolation-tier by default.

Using Euler Finance to Short Tokens

Hedging in Uniswap v2 using Euler Finance

Modern hedging, using yew (Taxus Baccata)
Value of a LP position in terms of the numéraire. Green shaded regions represent profitable price ranges.
Value of a delta-neutral LP position. Green region represents the profitable price ranges. Fees = 5%. https://www.desmos.com/calculator/pkscywsiiw
Value of a bearish LP position. Green region represents the profitable price ranges. Size of the hedge = 200% of the numéraire value. https://www.desmos.com/calculator/pkscywsiiw

Hedging in Uniswap v3 using Euler Finance

Value of a delta-neutral LP position. Green region represents the profitable price ranges. Fees = 5%, r = 1.5. https://www.desmos.com/calculator/669zg1rmvb
Value of a delta-neutral LP position. Green region represents the profitable price ranges. Fees = 3%, r = 1.001.

Takeaways

  • Euler Finance allows users to incorporate short positions into their strategies in a permissionless manner.
  • Euler Finance allows liquidity providers to provide liquidity in all Uniswap pools even if they hold a bullish, bearish or neutral outlook on the token.
  • To establish a delta-neutral strategy, simply borrow tokens and lock them in a Uniswap pool at 50:50 ratio with ETH or stablecoin.
  • For bearish LP positions, borrow tokens, sell half for ETH/stablecoin and lock them in a Uniswap pool at a 50:50 ratio with ETH/stablecoin.
  • Euler Finance will ultimately benefit Uniswap because it allows LPs to deploy liquidity in all pools (and not just bullish tokens).

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