Pseudo delta neutral farming

Looking to hedge against your volatile positions? Look no further.
9 min readAug 22, 2023

As we venture into more complex financial strategies enabled by Lendle, it’s crucial to start by grasping the concept of pseudo delta neutral farming. But before we delve into the practicalities of how Lendle facilitates this strategy, let’s take a moment to understand what pseudo delta neutral entails and revisit the core principles of yield farming. This groundwork will lay the necessary foundation to comprehend Lendle’s pivotal role in empowering this advanced strategy within the realm of decentralized finance (DeFi).

Introducing: Yield Farming

In the dynamic universe of DeFi, an intriguing avenue is open for users seeking returns: yield farming. This approach involves contributing liquidity to an Automated Market Maker (AMM) and reaping a variety of yields in return. The yields encompass a spectrum of rewards, ranging from trading fees and protocol tokens to incentives woven into the ecosystem. To understand the mechanics and potential behind yield farming, let’s delve into its foundational aspects.


An essential aspect of yield farming is fee-sharing. In DeFi platforms, users are charged fees for utilizing services like decentralized exchanges (DEXes). For instance, a common DEX fee is 0.3% per trade. A significant portion of these fees is allocated to incentivize liquidity providers who facilitate trading by contributing their assets. This strategy aligns the interests of traders and liquidity providers, fostering a mutually beneficial relationship.

Protocol Tokens

Beyond fee-sharing, several DEXes introduce protocol tokens as incentives. DEXes like our partner FusionX exemplify this approach by rewarding liquidity providers with their native tokens, such as FXS. By extending incentives across V2 and V3 pools, DEXes incentivize liquidity contribution, promoting a thriving ecosystem for participants.

Ecosystem Incentives

Amidst the dynamic DeFi expansion, newer blockchains emerged aiming to diversify from the established Ethereum ecosystem. These networks introduced a third layer of incentives: ecosystem incentives. Typically issued by native networks or foundations, these incentives encourage broader adoption. Mantle, for instance, might introduce ecosystem incentives to incentivize liquidity while also already offering grant programs for builders.

In the realm of yield farming, fee-sharing, protocol tokens, and ecosystem incentives intersect, creating a comprehensive approach to generating returns within DeFi. This strategic interplay elevates the DeFi experience, uniting liquidity providers, traders, and builders under a shared pursuit of financial efficiency and innovation.

Navigating Yield Farming and Impermanent Loss

Having established an overview of yield farming and its associated rewards, our focus now shifts to a deeper exploration. In this segment, we’ll delve into a practical example while delving into the crucial concept of Impermanent Loss (IL), a factor that can significantly impact the profitability of the yield-farming strategy. By examining this interplay, we gain a more comprehensive understanding of the nuances surrounding yield farming within the decentralized finance landscape.

Understanding Impermanent Loss in Depth

While participating in Velodrome’s liquidity provision might yield an enticing 13%, it’s essential to weigh this return against the inherent risk of Impermanent Loss. This section delves into the intricacies of Impermanent Loss, shedding light on its significance within the context of yield farming strategies.

In the Velodrome USDC-ETH pool, liquidity provision demands an equal-value commitment of two assets — say, $1000 in ETH and $1000 in USDC. However, the equilibrium is disrupted as market dynamics unfold. With changing ETH prices, the exchange between USDC and ETH alters the balance within the pool. As more people trade USDC for ETH, your exposure shifts, resulting in less ETH and heightened USDC holdings. Consequently, if ETH prices surge, your exposure to ETH diminishes.

Impermanent Loss encapsulates the disparity between holding these two assets individually and the evolving exposure driven by market price variations during liquidity provision. To incentivize liquidity providers to undertake this risk, they are rewarded through trading fees and additional incentives. The crux lies in the equilibrium between these rewards and the potential losses stemming from the asset balance shift within the pool. Ideally, these fees will outweigh the losses incurred by the shift in asset balance in the pool.

The concern surrounding Impermanent Loss often serves as a deterrent for liquidity provision, with its impact on farming positions overestimated by many. To comprehend its implications fully, practical tools like an Impermanent Loss calculator prove invaluable. This resource quantifies the tangible effects of price shifts on position values, aiding in making well-informed decisions.

For pairs involving a volatile asset and a stablecoin (such as ETH-USDC), a reasonable benchmark is assuming a 5% Impermanent Loss, assuming that ETH’s price doubles or halves. Armed with this practical insight, yield farmers can approach their strategies with a clearer perspective. It’s vital for yield farming projects to offer substantial rewards to counterbalance potential price volatility.

Let’s contextualize this concept with an example from the Velodrome pool, boasting a tempting 13% yield. Under this yield rate, achieving a 5% return would span approximately four months. In the event that ETH’s price doubles within this timeframe, the strategy would essentially break even. This illustration underscores the imperative for yield farm rewards to adequately mitigate potential asset price fluctuations. The graph below illustrates how price variations can impact the amount of Impermanent Loss experienced by a liquidity provider in a 50/50 pairing.


Impermanent Loss takes on a very tangible aspect when one token within a pool surges by 300% in comparison to the other coin. In this scenario, the liquidity provider grapples with an IL of around 12.5%. This signifies a reduction of 12.5% in value compared to the straightforward act of holding onto the tokens.

A strategic approach to mitigate the impact of IL in yield farming revolves around selecting a pool where asset prices maintain a relative stability. This entails providing liquidity in a pool where token prices exhibit minimal divergence. For instance, consider a pool that pairs ETH and stETH. In this setup, stETH functions as a claim on ETH, tightly mirroring its price trajectory. Consequently, this alignment substantially reduces the risk of IL when contributing liquidity.

Using Lendle for Pseudo-Delta-Neutral Yield Farming

With a foundational understanding of liquidity provision and the impact of Impermanent Loss, the stage is set to delve into the realm of pseudo-delta-neutral yield farming using Lendle. This advanced strategy brings a new dimension to the DeFi landscape, offering the promise of optimized yield generation while navigating potential risks.

Delta neutral is a portfolio strategy that utilizes multiple positions with balancing positive and negative deltas so the overall delta of the assets totals zero. (Investopedia)

In the realm of cryptocurrency, delta-neutral strategies find practical application in what’s commonly known as the “carry trade.”
This approach often comes into play during bullish market phases, capitalizing on favorable funding rates within the derivatives space. Let’s break down this concept in a straightforward manner, understanding how it operates within the financial landscape.

Imagine you’re holding 1 Bitcoin in your spot holdings. Concurrently, you engage in a short position by utilizing perpetual futures, effectively shorting 1 Bitcoin. Now, if the funding rate associated with these futures happens to be an appealing 8%, a fascinating dynamic takes shape.
Your spot-held Bitcoin remains steady in value, contributing no yield to the equation. However, the short Bitcoin within the futures contract reaps a robust 8% due to the favorable funding rate. This strategic move allows you to effectively earn 4% over the entire carry trade — the result of this clever interplay between spot assets and derivatives.

Lendle introduces a parallel avenue for realizing isolated and delta-neutral positions. This involves strategically borrowing an asset designed for single staking purposes. Suppose the supply Annual Percentage Yield (APY) on another lending market surpasses Lendle’s borrowing APY. In theory, you could borrow that specific asset and supply it on the alternative lending market. However, due to market dynamics, this approach tends to be less frequent. Market forces often prompt the migration of supplied assets from Lendle to other lending markets, impacting the practicality of this strategy.

However, the realm of multi-coin strategies emerges as an avenue full of strategic potential, harmonizing Lendle with other DeFi protocols. Let’s break this down using a straightforward example featuring USDT and WETH.

Imagine Alice, holding 150 USDT on Mantle, seeks to secure an appealing yield while avoiding the volatility of certain assets. Here, a range of options present themselves, each with its merits. A fundamental approach involves depositing the entire 150 USDT on Lendle, tapping into the supply APY and supply APR in $LEND.

As of the current landscape, this strategic move would yield Alice an impressive 12.99% across her 150 USDT holdings — an alluring prospect.

Nevertheless, the burgeoning Mantle ecosystem opens the door to even greater yield potential for Alice. By engaging with the incentives highlighted earlier, she can significantly enhance her yield. This option involves navigating the synergy offered by tapping into various protocols.

Let’s take a concrete example to illustrate this concept. FusionX, for instance, presents a farming pool designated for the WETH/USDT pair. In this hypothetical scenario, we’ll assume that this pool delivers a combined yield of 40%, encompassing both swapping fees and FXS rewards.

However, even with this enticing yield, Alice’s priority remains safeguarding herself from the volatility inherent in ETH. Consequently, despite the attractive yield on offer, this particular farm might not align with her objectives.

Enter the realm of pseudo-delta-neutral farming — a strategic approach that bridges the gap between yield optimization and risk management.

Now, let’s drill into specifics. USDT has a Loan-To-Value (LTV) of 80% on Lendle, with a liquidation threshold set at 85%. To ensure her safety, Alice opts for a prudent 50% LTV on her USDT position, offering a buffer against potential liquidations and allowing her ample time to respond to market shifts.

Here’s how she executes her strategy: Alice deposits 100 USDT on Lendle and secures a $50 WETH loan. With 100 USDT as collateral and $50 WETH in her wallet, she retains 50 USDT.

The next step involves tapping into the WETH/USDT farm on FusionX, leveraging her $50 WETH and 50 USDT to earn a robust 40% APR.

On the other hand, the borrow APY for the ETH loan stands at 5.78% on Lendle, while the USDT supply APY holds at 1.56%

In the grand scheme of things her total position would therefore yield:

It’s worth noting that the previously mentioned yields don’t account for the native rewards in $LEND tokens. When you factor these rewards in, the yield skyrockets to over 47%!

Even without considering the $LEND rewards, the 25.78% Annual Percentage Rate (APR) achievable with USDT as collateral is undeniably remarkable.

However, let’s not overlook a crucial detail: the position isn’t entirely delta neutral, which is why it’s called pseudo-delta neutral. This distinction stems from the inherent Impermanent Loss risk associated with the WETH/USDT pair on FusionX, as elaborated on earlier in this article.

To elaborate: Alice borrowed $50 worth of WETH. Consequently, the loan repayment is also tied to WETH. Now, imagine the price of Ethereum doubles during her position. This would double the value of her borrowed ETH loan, but due to the IL curve she would have 5.72% less in the Liquidity Pool pair (WETH/USDT) resulting in a gap of $5.72.

Considering the entire position with $150 yields 25.78%, this potential 5.72% difference roughly translates to a farming duration of around 53 days.

It’s important to note that the assets mentioned here aren’t the only ones suitable for this strategy. Lendle allows a wide range of collaterals, and any available market can be borrowed from to craft Pseudo-delta neutral strategies.

To craft a well-informed assessment of this strategy, IL calculators are invaluable tools. Forecasts and careful considerations ensure unexpected losses don’t catch you off guard. As always, prudent risk management remains essential — approach the endeavor with care and precision to safeguard your assets effectively.

Lendle enables risk mitigation.

In our exploration, we’ve delved into impermanent loss, yield farming dynamics, and the power of pseudo-delta-neutral strategies achieved through Lendle.

Yield farming’s blend of incentives and rewards shapes liquidity provision for calculated returns and risk management. Impermanent loss, though challenging, can be managed with strategy.

In fact, Lendle’s flexibility introduces pseudo-delta-neutral strategies, merging yield potential with risk mitigation. This synergy taps into surrounding DeFi ecosystems, inviting users to optimize their financial strategies.

With this in mind, with each step taken to provide a deeper financial education, we hope to empower our users for the evolving DeFi journey ahead. Thus, we invite DeFi enthusiasts to stay curious, stay prudent, and to continue exploring the multifaceted dimensions of DeFi’s evolving landscape.