Delta-neutral strategies in altcoins: 2023 performance

Throughout 2023, Resolv Labs actively developed the stablecoin backed by the delta-neutral strategy, primarily focusing on Ether as underlying token.

We chose ETH for Resolv due to its optimal yield-liquidity balance, vital for scaling our product. However there are other tokens that might be used for similar strategies, potentially offering higher yields.

In this article, we are exploring results of the Y2023 performance of delta-neutral strategies based on different altcoins. It turns out, best-performing strategies based on major alts provided 1.5+ times better returns compared to ETH-based ones.

SCOPE OF RESEARCH

Tokens

For our research, we have identified the following criteria:

• Only tokens with $1bn+ market capitalization are considered;

• Tokens have listed inverse perpetual futures to enable passive delta-neutral strategy. (The same can be replicated with linear futures margined in stablecoins, although it requires path-dependent rebalancing and has a heavier dependence on trading slippage).

Typical tokens satisfying the above criteria would be the most prominent L1 blockchains.

The shortlisted candidates satisfying above criteria are ATOM, DOT, AVAX, ALGO, MATIC, SOL, ADA, TRX, FTM, and NEAR. We compare those with ETH and BTC as our benchmark strategies.

Strategy

The benchmark strategy used for the analysis is as follows:

• Portfolio consists solely of long positions in a relevant token and short positions in inverse perpetual futures at Binance;

• Short positions at all times fully cover the long positions to maintain market neutrality;

• Only 75% of the long positions in the token are staked. The other 25% are deployed as margin to collateralize futures. For example, if the strategy consists of a 100 ETH long position and ETHUSD short futures with a dollar volume covering such 100 ETH, then 75 ETH will be staked and 25 ETH used as margin for futures;

• We have deliberately ignored staking/unstaking latency for different tokens, but this may be a significant factor in maintenance of a real-time strategy.

The result is the market-neutral portfolio, the performance of which is built up from staking rewards and harvesting futures funding rates.

Backtest

For the backtest, we pulled 1 year data (from January to December 2023). The backtest runs each day and accumulates staking and funding yields. The resulting accumulated return as of Dec 31 2023 is shown on the chart below. ATOM leads the ranking with 17.94% annual profit, 1.6x times more than ETH strategy.

Distribution of 2023 annual yields in delta-neutral strategies for different token underlyings. Data: Binance Futures, Stakingrewards.com

What is the contribution of staking and funding rate rewards to the final yields? The chart above demonstrates that altcoins bearing higher staking rates, such as ATOM and DOT, ended up higher on the leaderboard in terms of overall yield. It may make sense to watch closely other protocols with high nominal distribution rates, such as Celestia (TIA). Although we did not include it in the analysis (it has only been around from Q4 2023), it may prove to be a leader for a similar 2024 delta-neutral yields ranking due to its 20+% staking rewards.

Now, let us zoom in on the top five token strategies of 2023 and their monthly performance track record in 2023. One takeaway here is that returns have been pretty consistent, with very limited month-over-month drawdown.

Cumulative performance in delta-neutral strategies for different token underlyings. Data: Binance Futures, Stakingrewards.com

Implementation

As stated above, practical implementation of such strategies requires some additional effort, but let us take a brief look at how a basic strategy backed by Cosmos Hub (ATOM) tokens can be set up. It then becomes a matter of positions monitoring and rebalancing to keep it performing well.

1. Buy ATOM on an exchange and simultaneously sell ATOMUSD futures in a volume corresponding to the dollar value of ATOM stake. In terms of venues, Binance and OKX have relevant futures contracts. For further reading on setting up inverse perpetuals positions, you can access this guide by Binance.

2. Set up a wallet supporting Cosmos Hub. We recommend Keplr as the renowned solution.

3. Transfer a portion of ATOM tokens from the exchange to the on-chain wallet. Quantity of tokens to be used for on-chain staking will depend on a comfortable level of margin left to support futures. It is a balance between how “low maintenance” your strategy is and how much return you can expect.

4. Use the on-chain staking infrastructure of your choice. Keplr has a comfortable dashboard allowing the allocation of tokens to available staking nodes.

For all other altcoins, the idea is the same and the only difference is how staking is done. For implementation, we encourage accessing detailed guides written by prominent staking providers such as P2P.org and Chorus.one.

CLOSING THOUGHTS

Delta-neutral strategies backed by altcoins are capable of delivering a relatively high premium for a liquid money market portfolio. Of course, it is important as always to consider counterparty and protocol risks associated with trading venues and staking providers, however decent performance can be achieved using tier-1 infrastructure without compromising on quality.

A promising variation of such strategy is to maintain futures on perpetual DEXes, where funding rates may be significantly higher due to structural disposition in long and short open interest. We will share insights on this in one of the next articles — stay tuned!

In maintenance of a live strategy, it is important to keep track of margin allocated to the futures and rebalance in case of significant price actions. It is especially sensitive for tokens with higher volatility and significant unstaking latency, which can be as long as 14–21 days for some of the networks. We recommend this strategy to sophisticated investors with access to bridge capital necessary to serve temporary margining requirements at all times.

All in all, the current bull shift of the market not only opens up opportunities in expressing directional views but also drives yields in market-neutral strategies. Employing such strategy, either manually or tokenized via Resolv, can be helpful in asset management as an alternative to existing money market instruments in stablecoins.