⚖️How Flat Money Maintains a Delta-Neutral Marketplace
Last updated
Last updated
The Flat Money and Perpetual Futures Markets achieve an overall delta-neutral position when the available rETH liquidity is borrowed by Leverage Traders to open long positions.
The protocol’s Borrowing Rate provides UNIT LPs and Leverage Traders incentives to keep a delta-neutral position between the Flat Money and Perpetual Futures Markets.
When the Borrowing Rate is positive, Leverage Traders pay UNIT LPs. A positive Borrowing Rate attracts more UNIT LPs, who provide additional rETH liquidity for Leverage Traders to open long positions.
When the Borrowing Rate is negative, UNIT LPs pay Leverage Traders. A negative Borrowing Rate attracts more Leverage Traders, who open new long positions, borrow rETH, and pay UNIT LPs various fees.
As an example, let’s say UNIT LPs contribute 100 rETH to the protocol’s shared liquidity pool at launch.
Because UNIT LPs have contributed rETH liquidity and taken a short position, but the liquidity isn’t yet utilized by Leverage Traders, the Borrow Rate turns negative to attract Leverage Traders to the Perpetual Futures Market. In this scenario, the Flat Money Market has a delta of 1.
The negative Borrow Rate begins to attract Leverage Traders to the Perpetual Futures Market, and they open a total of 50 ETH in long positions. The Flat Money Market now has a delta of 0.5 and the Borrow Rate remains negative.
Again, the negative Borrow Rate creates an incentive for Leverage Traders to increase their long positions. An additional 50 ETH in long positions is opened, which creates a delta-neutral equilibrium within the Flat Money Market, where shorts and longs are evenly matched. Under delta-neutral conditions, the Borrow Rate is neutral.
If Leverage Traders open additional long positions worth 20 ETH, the Borrow Rate turns positive to attract UNIT LPs to the Flat Money Market. In this scenario, the Flat Money Market has a delta of -0.2.
This is just one example of how the Flat Money protocol maintains a delta-neutral market. If you’re interested in asking about specific examples, join us in Discord and reach out to the team.
