Delta-Neutral Stability

What is "delta"?

"Delta" refers to the sensitivity of the derivatives contract to a change in the price of the underlying asset.

By way of example, if Ethena did not execute a hedge with respect to 1 ETH transferred by a minter upon mint of USDe, the backing of USDe would have a positive delta of 1 ETH. As a result, the USD value (and, by extension, USDe backing value) of the 1 ETH would change equally with the change in the spot market price of ETH.

Read more: Introduction to Option Greeks

What is delta-neutral stability?

A portfolio can be considered to be "delta-neutral" if it has a delta of 0. This means the portfolio is NOT exposed to the price change in the underlying value of the asset.

Following on from the example above, where Ethena naturally has a positive delta of 1 ETH from a user providing 1 ETH of backing, if Ethena hedges 1 ETH worth of delta by going short a perpetual contract with a nominal position size equal to that 1 ETH, the delta of Ethena's portfolio is 0.

Said differently. when a portfolio is delta-neutral, the value in USD terms remains constant regardless of market conditions (ie regardless of any change in the spot price of ETH). The price of ETH could triple and then fall by 90% one second after another & the USD value of the portfolio would remain unaffected (outside of momentary dislocations between spot and derivatives markets). This is because the profits from the 1 ETH tripling in price are perfectly offset by losses from the equal-in-size short perpetual position. Here is a worked example of a portfolio being delta-neutral.

Ethena trades with no effective leverage across exchanges as the delta offsetting short perpetual positions are equal in size to the backing assets.

To note, many institutional market makers remain delta-neutral to avoid profits/losses from price volatility and this is a very familiar concept across both traditional finance & digital assets.