Hedging Uniswap LP

The hedged Uniswap market-making strategy enables users to seamlessly borrow a volatile asset from a lending protocol and provide it as LP (along with a stable asset) to a Uniswap-like DEX.
For example, a USDC-AVAX strategy would automatically execute the following actions on the user’s behalf once they deposit USDC:
  1. 1.
    Strategy uses a portion of the USDC deposits as collateral in a lending protocol like Compound
  2. 2.
    Strategy borrows AVAX against the USDC collateral
  3. 3.
    Strategy provide both USDC & borrowed AVAX as liquidity to a Uniswap exchange
  4. 4.
    Strategy rebalances borrowed amounts to match LP amounts as prices shift
Because AVAX was borrowed, if the price of AVAX goes down, the user's overall balance is not impacted (the borrowed AVAX will simply be returned if the user decides to withdraw). Our strategy uses automated trading bots that ensure the amount of AVAX provided to the DEX remains as close as possible to the amount borrowed. This results in a delta-neutral position, meaning our portfolio is impacted in the same way independent of whether the price of AVAX goes up or down.
Of course this type of position still carries some risk, specifically when prices move suddenly in either direction. To limit this risk, the strategy monitors the market to rebalance the position as needed.