The longevity of investments is often defined by your risk tolerance and management style. The theory says that passive income with delta-neutral strategies is more than possible. Contemporary retail investors have a plethora of digital assets and derivatives to work with. This diversity grants access to a massive ocean of risk reduction methods many of which are what we define as true or pseudo delta-neutral.
Financial analysts and theorists use the term “Greeks” when referring to several properties of assets and their derivatives used in the famous Black-Scholes economic model that provides a simplistic yet satisfying and useful framework for investors to figure out how to allocate capital safely. Most risk management strategies employ the Greeks to identify the best course of action to protect capital from the dangers of the market.
Delta is the sensitivity of a derivative to the change in the price of underlying assets. Options, futures, and other similar instruments all have their deltas. When we say neutral, we mean an ideal situation in which the value of your holdings is not affected by the volatility in the market. It means that you are effectively creating a situation where your goal is to maintain zero or only positive value of assets under management.
The main goal of a typical farmer is to find the right balance between different positions and investment approaches to reach zero risk exposure. The simplest and most elegant example from the world of traditional finance goes like this:
This ideal theoretical situation does not happen too often yet serves as a great illustration of how to create true delta-neutral positions. Prognostic estimations usually do not account for a variety of risks associated with exposing your capital to the market. The specifics of the crypto market have to be considered just like any other factor.
In 2022, Haozhou Liang from the University of California published an intriguing research focusing on the effectiveness of using delta-neutral strategies to trade meme stocks such as GME. Since many cryptocurrencies are strongly affected by social media sentiment and other factors unrelated to economic fundamentals, this research is of great interest to retail investors planning to focus on yield farming and crypto assets in general.Potential loss reduction was found to be around 11.3% for short-term positions compared to non-hedged. It seems like a good number but many tradfi financiers can achieve up to 90% in loss reduction using the same delta-neutral approach. It means that using the method in the crypto market is better than nothing but may not deliver the same results as in the case of stocks and bonds.
Many experts argue that yield instruments are much better executed in the world of crypto compared to tradfi. In many senses, it is true yet we have to account for the fact that many existing products in the DeFi sector still have to mature before the final judgment is given by market participants.
Many delta-neutral approaches work well because some platforms are encouraged to incentivize participation through incredibly attractive yields which are often financed with token emission and revenue — all to keep liquidity as high as possible. Using different rates is a great way to reduce the exposure of your investments to risks in an ideal world.
In 1992, Kahneman and Tversky published an influential work about the prospect theory where they found that people are twice as powerfully affected by negative outcomes of their activities. Gamblers and investors alike are more scared of losing money than they are excited to gain the same amount. This fear often drives people to make decisions based on the desire to avoid losing out on something.
According to the study conducted by Taxify, an app similar to Uber, framing inactivity as a loss of potential income increased the number of new signups by 54%. This number is in line with the findings of Kahneman and Tversky.
Contemporary retail traders are affected by the loss aversion phenomenon and often seek less dangerous investments. Yield farming strategies help them find the right approach thanks to several key advantages:
Typical financial hedging strategies employ assets and their derivatives. The same principle is applicable in yield farming. One can spend a long time looking for on-chain opportunities to reduce risks. However, using perpetuals is easier and opportunities occur regularly. Different methods of hedging should not be ignored. A retail investor should try engaging in all of them before deciding, which is better.
Many centralized exchanges offer derivatives for tokens that are also suitable for staking. This opportunity is too valuable to pass. The pass to implementing a strategy that uses perpetual futures and staking is quite simple:
The issue here is that liquidation may be impossible or unprofitable due to market conditions. You should also consider that funding rates and APR may not be high enough to cover price movements of underlying assets.
Utilizing lending platforms to achieve better yields while disconnecting your assets from price changes is a great approach to finding the right delta-neutral strategy. Below is a simple example of how you can do it:
The price of the underlying asset does not matter since you do not have to return supplied tokens acting as collateral. Instead, you will return $stNEAR. Note that liquidation risks are still quite dangerous and the cost of borrowing must be accounted for.
When it comes to comparing the results of different investment efforts, one must remember the overall uncertainty that defines the crypto market. It is possible to make a couple of lucky purchases and stakes to achieve great success. However, statistics and research indicate that investors who use delta-neutral approaches usually achieve better results in the long run.
The table below compares delta-neutral and traditional investment strategies:
| Yield farming without exposure | Straightforward yield farming |
| Allows for stricter risk management | Diversification is the only way to hedge against risks |
| Costs are higher due to the utilization of derivatives | Streamlines capital allocation |
| Allows to make short-term corrections without touching long-term holdings | Relies on the correctness of the initial prognosis |
| Over-hedging is an issue for overly zealous investors | Staking and yield farming in general can be managed with a hands-off approach |
The vast majority of successful investors prefer using a variety of tools to prevent losses. While taking on high risk for massive returns may seem seductive, reducing the exposure of your portfolio is a much more effective strategy if you are playing the long game. According to the research conducted by Nelson, Moffitt, and Affleck-Graves, investment companies that utilize hedging instruments enjoy a 4.3% better portfolio appreciation per year compared to those that do not hedge against risks.
The variety of products offered by the DeFi (Decentralized Finance) sector feels overwhelming to a newcomer. Since the structure of the yield-farming ecosystem is much more complex compared to similar offerings in the world of tradfi, navigating the sea of decentralized applications is a challenge even for experienced veterans.Alchemy claims that there are 64 credible yield-farming applications. The number goes up to a hundred if you include some of the shady ones. If you need solid recommendations for DeFi protocols for delta-neutral farming, take a closer look at some of the apps below!
Launched in September 2020, Beefy is a fully decentralized, community-governed platform that offers its proprietary Multichain Yield Optimizer. The developers claim that you, as an investor, will enjoy the best APYs without worrying about the safety of your investments since Beefy does not take assets into custody.
The app is capable of automating all user activities in liquidity pools, market-making projects, and any other form of yield farming. The main product is the Vault. These are asset pools managed by strategies or the proprietary system called Cowcentrated Liquidity Manager. Everything is automated and requires zero effort on the side of an investor.
If you are interested in crypto yield optimization, Beefy is a great choice. Here are some investment options on the platform that are available at the time of writing:
Also launched in September 2020, Harvest Finance directly competes against Beefy by offering very similar products. One of the core differences is the streamlined interaction between users and the platform. To get started, you will only need a functioning MetaMask wallet and at least $10 worth of crypto.
Harvest also hopes to build a strong community of users by offering rewards in its native token $FARM and promoting participation in governance. The simplicity of the interface and straightforward investment framework make this platform a good choice for beginners.
APYs are optimized through the strategy deployment method that follows a very simple pattern: analyze the product’s reputation, review tokenomics, audit smart contract integrity, and design a strategy to automate the investment process.
Here are some “farms” that may catch your attention:
Praised by many as an excellent portfolio tracking tool offering swaths of on-chain data, Zapper has been going strong since May 2021. The platform has a convenient interface allowing users to keep an eye on their holdings, stakes, and liquidity pools without switching between different wallets and apps.
A Dapp to end all other Dapps, Zapper is a lightweight instrument for people who do not need automation to find the best yield options yet have a strong desire to keep their portfolios nice and tidy. This application is compatible with MetaMask, Coinbase Wallet, and WalletConnect. The information on your holdings is collected automatically.
Zerion is a whole ecosystem with flagship products like DNA (digital avatars) and ZERO (a development framework). As an investor, you will most likely fall in love with the wallet offering a wide range of functions allowing you to easily track the performance of your portfolio.
The automatic DeFi tracker will pull all the necessary data directly from chains while organizing them neatly. It is quite handy that Zerion also keeps tabs on any unclaimed rewards and interest rates.
Here are some other interesting features:
This platform is one of the youngest in the pack. Launched in November 2023, Rivo has made a big splash in the industry by offering a lineup of innovative products including cross-chain swaps, preselect strategies, and ZAPs. The latter is a product allowing investors to join and exit investment projects in just one click while paying gas fees in any currency.
Yield indices operate like traditional stock indices allowing users to invest in a variety of pools and lending platforms simultaneously while enjoying consistent rewards even if they are slightly lower compared to investing directly.
Rivo has secured its position in the market by appealing to professionals seeking adaptable solutions and newcomers who want to invest in something familiar like indices.
Below are some of the best offerings from RIVO:
The platform was launched in 2019. It has been offering a diverse lineup of products to its users for over five years during which a plethora of new features and investment options was released by the developers. At the time of writing, 1inch offers fast swaps between USDT, USDC, BNB, ETH, and even stETH.
You can also use 1inch to track your portfolio and directly invest in many popular staking, lending, and trading platforms. Staking 1inch V2 offers 4% APR and has $69 million in TVL. If you are looking for a convenient place to keep track of assets under management, 1inch is a good choice.
You can run a delta-neutral strategy on any of the platforms in our list. We highly recommend employing some form of hedging to prevent losses and achieve better results in the long run. Trying to catch an overnight success by risking everything on a promising investment prospect may sound appealing but crypto is a long game that often punishes those who use overly aggressive trading and yield farming strategies!
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