Delta-Neutral Portfolio

A delta-neutral portfolio is a result of a trading strategy that seeks to minimize exposure to price fluctuations in an underlying asset, such as a cryptocurrency.

In a delta-neutral portfolio, an investor seeks to balance the risk of price movements by combining multiple positions that offset price movements of each other. This is typically achieved through the use of financial derivatives, such as options or futures contracts.

Here's how it works:

1. Underlying Asset: The delta-neutral portfolio includes a certain quantity of the underlying asset (e.g. BTC or ETH). This serves as the core asset in the portfolio.

2. Derivative Contracts: To achieve delta neutrality, the investor enters into derivative contracts that are directly linked to the underlying asset's price.

While this strategy is well-known and widely used in traditional finance, it is the ability to tokenize a delta-neutral portfolio that allows to create a fundamentally new type of stablecoin. And at it's core, it requires only on-chain assets and derivatives market to function.

For the sake of further illustrations, let's have a closer look on the most common derivative instrument used for hedging.