💂Arbitrageur

Protecting LPs Through Delta Neutrality, and receiving funding rates (through arbitrage earning) via prices discrepancies

How arbitrage protects LPs

The primary objective of implementing LP-Delta-Neutral Perpetual Futures is to safeguard LPs from the volatility risks associated with their liquidity positions. By employing the skew-dependent premium/discount function, vDEX ensures that LPs can achieve and maintain a delta-neutral state, significantly reducing their exposure to price movements in the underlying assets.

LPs are now protected by delta-neutral pricing instead of the funding rate mechanism.

For example, consider a scenario where the LPs have a net long exposure due to trader short positions dominating open interest. If the underlying asset plunges, LPs will lose money. In response, the platform adjusts the perp price to reflect a discount on top of the index price; the perps price is lower than the index price now. This discount makes long positions more attractive to traders (arbitragers); therefore, LPs will have their delta position back to neutrality when those long positions are opened against existing short positions.

Arbitrageur hedges for LPs by capitalizing on price discrepancies between the perp price on vDEX and the spot/perp prices on other exchanges.

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Numerical Example

Time	Action	Platform	BTC Price (USDC)
T1	Open Short	vDEX	71,362.47
	Open Long	External	71,000
T2	Close Short	vDEX	Converged Price
	Close Long	External	Converged Price

1. Identifying Price Discrepancies: Arbitrageurs monitor the perp price on vDEX and compare it with the spot/perp prices from external sources. For simplicity, let's assume the latest perp price on vDEX for BTC is $71,362.47 (reflecting a 0.51% premium over the index price of $71,000 due to LP delta imbalance: trader long > short), while the spot/perp price on another exchange is still $71,000.

2. Executing Delta-Neutral Arbitrage: Upon identifying this price discrepancy, the arbitrageur takes action to profit from the difference while maintaining delta neutrality.

2.1 Opening a short position on vDEX ($71,362.47)

2.2 Simultaneous spot purchase/long position open on the external market ($71,000)

2.3 Closing Positions and Realizing Profit: The arbitrage opportunity exists until the price discrepancy is arbitrated. When the prices converge, the arbitrageur closes both positions. The profit from this arbitrage trade is the difference between the short selling on vDEX and the buy spot/open long on the external spot market, minus trading costs.

Thus, DN-perp encourages arbitraging to maintain delta neutrality and boost market efficiency.