Prehistoric Vaults β€” Delta-Neutral

Risk Level: Medium

πŸ““ Lab Journal Entry #04

Title: Delta-Neutral: Price-Stable Predation Author: Dr. Morales, Risk Mechanics Division Recovered From: Margin Analysis Node Ξ£-3, Jungle Edge Systems Lab

Purpose

This entry documents a REX unit trained to maintain balance β€” hunting yield from concentrated liquidity while neutralizing exposure to volatile price swings. Known as the Delta-Neutral Strategy, this approach enables stability-focused LPs to harvest fees without being dragged down by impermanent loss.

Overview

Delta-Neutral Rexes deploy liquidity (e.g., $ETH–$USDC) into a narrow range to maximize swap fee collection, then short-hedge the $ETH exposure on Tea-REX. The hedge adjusts dynamically to maintain near-zero directional risk β€” the "delta" in question.

  • Strategy Type: LP + short hedge

  • Target Assets: $ETH / $USDC

  • Objective: Minimize drawdown, maximize net yield

  • Tools: Concentrated liquidity + margin shorting via Tea-REX

Behavior and Triggers

This strategy rebalances its hedge when:

  • Price moves outside the LP range

  • $ETH price shifts more than a preset % (e.g. 3%)

  • A fixed number of time intervals (e.g., every 6 bars) elapse

Rebalancing allows it to remain agile in volatile terrain, while still collecting swap fees from within the chosen LP range.

Backtest Conditions

  • Period: Jan 8 – Mar 15, 2025

  • Initial Capital: 1,000 $USDC

  • LP Venue: DragonSwap (SEI Network)

  • Hedge Execution: Tea-REX margin system

Three key value streams were tracked:

  • Green line: Uniswap LP position (including estimated fees)

  • Orange line: Short hedge value

  • Black dashed line: Delta-Neutral portfolio net value

Delta-neutral LP performance over time

The red line: $ETH price (secondary axis) is provided as reference.

Despite ETH’s sharp decline, the strategy’s net value held steady thanks to active hedging. Fees continued to accrue while downside risk was limited.

Key Findings

  • Net Value Resilience: The strategy avoided deep drawdowns even during ETH crashes

  • Effective Hedging: Hedge value rose as ETH fell, offsetting LP exposure

  • Steady Fee Income: Swap fees continued accumulating throughout volatility

Research Notes

Proper parameter tuning is crucial. Variables such as range width, hedge sensitivity, and rebalancing cadence determine how efficiently the REX manages capital and risk.

REX Handler's Memo Delta-Neutral-trained Rexes don’t chase the trend, they patrol the middle ground, neutralizing noise and feasting on fees. Trained to stay still until provoked, then rebalance with precision.

🧾 Oversight Review β€” Vault Command Tier

Reviewed by: General Quantodon, Strategy Oversight Division

Results are promising. These Rexes hold formation under stress and demonstrate favorable fee accumulation.

However, their discipline must not be mistaken for resilience. Without precise handler tuning, the risk of slippage, over-hedging, or range exhaustion increases.

Approved for jungle deployment under monitored conditions. Future iterations should test wider range thresholds and longer rebalance intervals.

End of Risk Behavior Log

Signed: Dr. Morales β€” encoded with clawprint authentication.

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