Delta-Neutral Stability

What is "delta"?

"Delta" represents the sensitivity of a derivatives contract to changes in the price of its underlying asset.

For instance, if Seablocks does not hedge a position when the protocol purchase for example 1 ETH as backing for the synthetic asset, the backing would carry a positive delta of 1 ETH. This means that any fluctuation in ETH’s market price would directly impact the synthetic asset’s value in USD terms

What is delta-neutral stability?

A portfolio is considered "delta-neutral" when its delta is equal to 0, meaning it is not exposed to changes in the price of the underlying asset.

Continuing the previous example, if Seablocks offsets the 1 ETH backing by taking a short position in perpetual contracts equivalent to that 1 ETH, the delta of the portfolio becomes neutral. In other words, regardless of ETH’s price movements, the total value of the portfolio remains stable in USD terms.

A delta-neutral portfolio ensures that even if the price of ETH triples or drops by 90% in rapid succession, the synthetic asset's value remains unchanged, aside from temporary discrepancies between spot and derivatives markets. This is because any gains from ETH price increases are counterbalanced by equivalent losses in the short derivatives position.

SeaBlocks does not use significant leverage when trading across exchanges, as the short hedging positions are always proportional to the backing assets.

Notably, many institutional market makers operate with delta-neutral strategies to mitigate exposure to price volatility, making this approach a well-established practice in both traditional finance and digital assets.