⚛️Core Mechanics

T0: Traders' long position dominates/LPs' short position dominates. T1: Trader opened up a short position

LP-Delta-Neutral Perpetual Futures are ingeniously crafted to address the inherent volatility and risk exposure typically associated with providing liquidity for perpetual contracts, especially those involving long-tail assets. At the heart of this mechanism lies the commitment to achieving delta neutrality — a state where the sensitivity of an LP's portfolio to price movements in the underlying asset is minimised, thus insulating them from market directional risks and, therefore, liquidation risks.

Delta neutrality in this context is achieved through a dynamic and skew-dependent pricing model that actively adjusts the premiums or discounts on perpetual futures contracts. The adjusted price incentivises the arbitrageur/trader to help balance LPs' neutrality, irrespective of market conditions, by encouraging trades that align with the delta-neutral objective.

$$P_{\text{perp}} = (1 - c \cdot x \cdot |x|) P_{\text{index}}$$

A simple example:

T0: The trader's long position dominates (LP's short position dominates); the DN-pricing mechanism has lifted the perp's price, encouraging the trader to short as the current price is higher than the oracle price.

T1: trader/arbitrageur opens a short position (LP's short position mitigated), the DN pricing mechanism will push down the perp's price.

This hedging is highly efficient as both the external trader/arbitrageur and our built-in arbitrage vault seek risk-free returns. When vDEX/external prices converge, the arbitrageur earns a delta-neutral return.