Onchain yield products continue to grow, but the underlying mechanisms are often misunderstood.

Unitas Yield Academy is an educational series that explains these mechanisms using clear examples and current data. In this issue, we explain delta neutrality and how basis trades can generate yield from funding payments.

Delta measures exposure to price movement in an underlying asset.

A position is delta-neutral when long and short exposure are matched so the total position has no exposure to changes in the asset price.

For example:

• Long leg: $10M of ETH spot exposure

• Short leg: $10M short ETH perpetual position (hedge)

If ETH price increases, the spot position gains value and the short ETH perp position loses value. If ETH decreases in price, the ETH spot position loses value and the short perp position gains value.

The goal is to reduce directional exposure to ETH price movement while keeping exposure to other yield sources.

A basis trade can be executed by holding a spot asset such as ETH and opening a short perpetual position with the same notional size.

In this example, ETH spot is the long leg of the trade. The ETH short perpetual is the hedge. Margin collateral supports the short position and funding rate payments become the yield source.

When perpetual funding is positive, short positions receive payments from long positions. The long ETH spot position and the short ETH perpetual position remove directional exposure, while the funding payments generate yield.

This means the return source comes from market pricing between spot and perpetual markets. The strategy does not require asset price appreciation to generate yield.

USDu is backed by collateral deployed into Unitas yield strategies while sUSDu is the yield-bearing asset that receives returns generated by those strategies.

A basis trade is 1 example of how a delta-neutral strategy can produce yield for a yield-bearing stablecoin. The protocol manages the spot asset, hedge position, margin collateral and rebalancing. Users can hold USDu or sUSDu without managing the underlying positions directly.

In this model, USDu is the dollar asset backed by deployed collateral. sUSDu is the asset that accrues the yield generated by the strategy.

Delta-neutral strategies still carry risk.

• Funding rate risk exists because funding payments can decline or become negative

• Liquidation risk exists because short positions require margin

• Execution cost exists because rebalancing can incur fees and slippage

• Operational risk exists because positions must be monitored and adjusted over time

Risk management depends on collateral levels, margin policy, execution quality, monitoring and reserve verification.

Delta-neutral basis trades combine a long spot asset with a short perpetual hedge to reduce directional exposure.

Yield can come from funding payments while gains and losses from the underlying asset price are offset between the spot asset and the hedge.

In our example, USDu is backed by collateral deployed into yield strategies, and sUSDu receives yield generated by those strategies.

Future issues of Unitas Yield Academy will continue explaining the mechanisms behind digital asset yield products.

Disclaimer: This article is provided for educational purposes only. Nothing in this article constitutes financial, legal or investment advice. All information reflects current protocol design and may change over time. Users should conduct their own research before interacting with any DeFi protocol.