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We’re really excited to introduce our first product “Alpha Orange Vault“, a market-neutral liquidity manager for the ETH-USDC pool on Uniswap v3. The vault will soon be live on Arbitrum.
Note: As we updated the vault's strategy after publishing this article, some of the strategies explained in this article are outdated (edited on 26th April 2023). - market neutral → hedge control (Delta hedging strategy) - Historical volatility → Bollinger Bands and 3DMA (Smart Liquidity)
The Alpha Orange Vault is a market-neutral vault that provides liquidity to the ETH-USDC pool on Uni v3 0.05% fee tier and earns real yield from the trading fees on Uni v3.
The vault will be limited to the Alpha Orange Crew, the group of long-term contributors to the growth of Orange Finance.
The Alpha vault is planning to be live for about one month. After the period ends, liquidity will be withdrawn from Uniswap
Otherwise, we will announce it on Discord.
The vault has a Smart Liquidity function that automatically sets the price range according to a market situation while making liquidity providers’ position neutral to any market situation by implementing a Delta Hedging Strategy. Also, the vault rebalances liquidity position when the price gets out of the set range in a timely manner, and its Rebalancing & Stop-loss Strategy is constantly updated weekly.
Liquidity provision to the vault is a single-sided deposit with USDC. A part of the deposited USDC will be swapped to ETH and they will be provided to Uni v3 pool in a 1:1 ratio.
Providing liquidity on the DEX is a bullish bet so liquidity providers are suffered from loss when the price of the provided asset goes down. By hedging the delta of a liquidity pair, however, you can take a neutral position in the market moving in any direction.
The alpha vault implements a delta hedging strategy by making a short position of ETH on Aave. A portion of the deposit goes to the ETH-USDC pool on Uni v3 through the vault while the rest is provided to Aave as collateral to borrow ETH for a short position. When the ETH price goes down, the short position makes a profit which covers the loss of LP value.
Smart Liquidity determines the price range for providing liquidity on behalf of liquidity providers and adjusts the fee tier based on market conditions. In order to take advantage of the capital efficiency offered by Uni v3, the vault aggressively sets the price range using a delta hedging strategy that mitigates the impact of price volatility.
As for the alpha vault, Smart Liquidity focuses on a 0.05% fee tier pool and sets a price range for liquidity provision with a statistical simulation by using the Historical Volatility of ETH for a certain period and processing them with the standard deviation model. Applying this approach, the vault will set a range narrower in the low-volatile market and vice versa.
There will be two range settings. One is range settings for liquidity provision, the other is range settings to execute stop loss. As the standard deviation model standardizes volatility, any outlier price volatility is excluded. To reduce unnecessary stop loss or rebalances, two-layered range settings aim to stabilize the vault’s performance.
More Statistic models & fee tier flexibility, planned to be implemented at the main product launch, will be explored and developed further to make liquidity as capital efficient as possible.
When the asset price goes out of range, the deployed liquidity no longer earns trading fees from Uni v3 pool. A rebalancing strategy will be implemented when the price of assets goes out of the set range as a Stop-loss. Since liquidity is converted to either asset of the pair as a result of price movement, we liquidate the position, swap half of the liquidity to another asset of the pair again, and re-deposit liquidity with a new range simulated by the statistic approach.
Furthermore, we check all the parameters once a week, even if the price still stays within the set range, to update the protocol’s rebalancing strategy based on the market situation.
The strategy includes a comparison of expected returns from fees and potential loss caused by rebalancing. Based on the trading volume and the share within the pool, we continue providing liquidity only if returns are expected to be larger than a potential loss, otherwise, we liquidate a position and keep assets till the strategy becomes profitable again.
For the alpha product, the rebalancing mechanism will be operated semi-automatically.
When the price surpasses a certain threshold downward or upward, a stop-loss mechanism is fired and the off-chain execution system automatically executes the stop-loss operation. Afterward, within 24 hours, the dev team analyses the market condition and reapplies range settings, then deploy liquidity to start earning fees again.
For the main product launch in the future, Orange Finance is going to automate all the operations based on the learnings from the alpha version.
We've been internally testing our strategies behind the scenes, and we're excited to share the impressive performance of our alpha vault, which will be going live on Arbitrum soon.
Start time: Feb-02-2023 09:57:33 AM +UTC ETH spot price: $1673.32
End time: Feb-09-2023 07:24:48 PM +UTC ETH spot price: $1597.69
Initial deposit amount: 5,000 USDC
Provide liquidity to ETH-USDC pool on Uniswap v3 (5bps)
Over the course of one week, our vault's liquidity grew from 5,000 USDC to 5,023.40 USDC, resulting in a remarkable 24.336% projected APR, even as ETH was dropping dramatically during the period.
While the three rebalances caused a loss of $256.68, our hedge strategy was able to successfully hedge $125.03, thereby reducing the actual loss to just $131.65.
The results of our test indicate that the vault outperformed other investment options. Holding USDC and ETH in a 1:1 ratio resulted in a value of $4,886.95, while an LP position without a hedge yielded $4,900.24. In comparison, our vault had a value of $5023.40, demonstrating the potential for significant returns on investment.
Performance $5023.40 - $5000 = $23.40 (Projected APR: 24.336%)
Rebalance 3 times - 1st range: 1,623.002404〜1,723.358098 (±3% range) for 3 days and 8 hrs - 2nd range: 1684.0874〜1567.1143 (±3.67% range) for 2 days - 3rd range: 1764.719909〜1597.692011 (± 5.1%) for 1 day and 14 hrs
Trading fee earned$156.92 (3.14% return for the initial deposit)
Total Loss by rebalance -$256.68
Hedged Value$125.03
Actual Loss-$256.68 + $125.03= -$131.65
Hedge Cost$1.87
Vault vs LP without hedge vs Hodl after the period - Vault:$5000 + $156.92 - $131.65 - $1.87 = $5023.40
- LP without hedge:$5000 -$256.68 + $156.92 =$4900.24
- Hodl (USDC and ETH with a 1:1 ratio at the beginning):$2,500 USDC + 1.494ETH * $1597.69 = $4,886.95
Ahead of the Alpha Vault launch, we are currently looking for members for the Alpha Orange Crew, who will contribute to the long-term growth of Orange Finance.
By joining Alpha Orange Crew, you will receive the Alpha role in Discord, giving you access to alpha information from the team and the opportunity to deposit early into the closed Alpha Orange Vault.
To join the Alpha Orange Crew, please complete the following form. (We may limit the number of Alpha members by using a screening process if we receive a large number of applications.)
We look forward to your application!
Orange Finance is an Automatic, Efficient, and Market Neutral Liquidity Manager for concentrated liquidity-type DEXes such as Uniswap v3, maximizing the capital efficiency of Uniswap v3 by maintaining an efficient price range through the use of statistical modeling and delta hedging strategies.
Effortless Liquidity Management on LPDfi protocols
Check out the Orange Finance community on Discord - hang out with 5827 other members and enjoy free voice and text chat.
This is the result of our internal test for a short period, and past performance is no guarantee of future results.
An unexpected marketing condition may occur and the vault may result in loss.
The Alpha vault got an audit, however, there is still a chance of unexpected errors and bugs. Please deposit only the amount you can afford to lose.
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