Simplified Examples
We will demonstrate through simplified examples how the price of the USDN token can remain stable even if the price of the underlying asset rises or falls. This is the delta-neutral strategy.
Initial Situation: Underlying Asset Is ETH, Priced at $1,000
Long Side
A trader bets on the rise of ETH. They deposit 4 ETH as collateral and use 3x leverage. This gives them a total exposure of 12 ETH (4 ETH x 3 = 12 ETH), representing a total exposure of $12,000.
The different components of their position are:
Total Exposure: Their total exposure to the market → 12 ETH ($12,000).
Trading Exposure: The synthetic part of their exposure that represents the leverage, which cannot be withdrawn → 8 ETH ($8,000).
Collateral: The real part of their exposure, which they can actually withdraw. This is the collateral they deposited → 4 ETH ($4,000).
Vault Side
A user deposits 8 ETH into the vault. These 8 ETH are worth $8,000. In exchange, they receive 8,000 USDN (each USDN being backed by $1 of ETH).
The vault therefore holds 8 ETH ($8,000), which corresponds to the total value of the 8,000 USDN in circulation.
If the Price of ETH Rises from $1,000 to $1,200
Long Side
Total Exposure: The trader maintains a total exposure of 12 ETH, but the value of this exposure increases from $12,000 to $14,400.
Trading Exposure: Their trading exposure (the "synthetic" part that represents the leverage) remains at $8,000. However, with the increase in the price of ETH, this now corresponds to 6.67 ETH instead of the initial 8 ETH.
Collateral: The gain generated by the increase in ETH's price is transferred to the collateral part of the long, which increases from 4 ETH ($4,000) to 5.33 ETH ($6,400). This is the portion the trader can withdraw, as their PnL (profit and loss) is credited here.
PnL: This scenario nets a profit of 1.33 ETH for the user.
Vault Side
To pay the PNL of the long trader, the protocol transfers 1.33 ETH from the vault to the long's
Before the price increase, the vault contained 8 ETH (with a total value of $8,000).
After transferring 1.33 ETH to the trader's collateral, 6.67 ETH remains in the vault.
However, since the value of ETH has increased by $200, these remaining 6.67 ETH are still worth $8,000. This ensures that the 8,000 USDN in circulation remain backed by $8,000, thereby maintaining the USDN peg at $1.
However, since the value of ETH has increased by $200, these remaining 6.67 ETH are still worth $8,000. This ensures that the 8,000 USDN tokens in circulation remain backed by $8,000, thereby maintaining the USDN token peg at $1.
If the Price of ETH Drops from $1,000 to $800
Long Side
Total Exposure: the trader maintains a total exposure of 12 ETH, but the value of this exposure decreases from $12,000 to $9,600.
Trading Exposure: their trading exposure (the portion tied to leverage) remains at $8,000, but since the price of ETH has fallen, this now corresponds to 10 ETH instead of the initial 8 ETH.
Collateral: the drop in ETH's price directly impacts the value of their collateral, which decreases from 4 ETH ($4,000) to 2 ETH ($1,600).
PnL: this scenario nets a loss of 2 ETH for the user.
Vault Side
To compensate for the long side's loss, the vault receives 2 ETH from their collateral.
Before the drop in ETH’s price, the vault contained 8 ETH (worth $8,000).
After recovering these 2 ETH, the vault now holds 10 ETH.
Even though the price of ETH has fallen to $800, the total value of the 10 ETH in the vault is still $8,000. This ensures that the 8,000 USDN in circulation remain backed by $8,000, thereby maintaining the USDN peg at $1.
Conclusion
When the price of ETH rises, the Vault covers the gains of the Long positions, while the value of USDN remains stable. Conversely, when the price of ETH falls, it is the Long traders who absorb the losses, thereby ensuring the stability of USDN. This mechanism is at the core of the Protocol’s Delta-Neutral strategy.
Of course, this example has been intentionally simplified. In reality, the Protocol will be used by many participants and will operate in a fully decentralized and permissionless manner. The goal here is to illustrate the basic functioning of the Protocol in an accessible way. In the following sections, we will explore in detail the mechanisms that constantly maintain the Protocol’s equilibrium, ensuring its Delta-Neutral state, as well as the ways in which users on the USDN side can generate yields.
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