Author(s): @TigrisOfGaul

Summary

This proposal seeks to enable the protocol to provide deep liquidity to TAROT-based pairs by using delta-neutral strategies in Tarot's lending pools. Depending on the token paired with TAROT in the resulting LP, these LP positions may be market neutral (in the case of FTM), or delta-neutral (in the case of USDC), with respect to TAROT.

Abstract

If adopted, Tarot will pursue using delta-neutral strategies to provide deep liquidity to TAROT-based pairs.

The principal risk to a leveraged delta-neutral position on Tarot is significant price appreciation for the volatile token (TAROT) in the LP. In this case, the protocol can mitigate any liquidation risk by using protocol-held TAROT to repay the appreciating side and rebalance the position to delta-neutral.

A leveraged delta-neutral position requires periodic rebalances to mitigate impermanent loss and maintain delta-neutrality in response to price changes for the volatile token in the LP.

Example - 3x Leveraged Delta-Neutral Position:

Initial position (no leverage):

Position	Value	Δ
USDC/TAROT LP	$1,000	+500
USDC Borrowed	$0	0
TAROT Borrowed	$0	0
Equity	$1,000	+500

3x leveraged position (delta-neutral):

Position	Value	Δ
USDC/TAROT LP	$3,000	+1,500
USDC Borrowed	$500	0
TAROT Borrowed	$1,500	-1,500
Equity	$1,000	0

Motivation

Currently, the protocol can borrow TAROT available in lending pools at very attractive rates (<1% APR). Furthermore, since a portion of the borrow fees (currently 10%) paid by borrowers to lenders is reserved by the protocol, Tarot can effectively borrow tokens for itself at a discounted rate.

A pilot program will evaluate whether this strategy is much cheaper and more effective than either liquidity mining (LM) or protocol owned liquidity (POL) in terms of capital efficiency. If the results of the program are positive, the protocol may expand this program to include other protocols seeking to provide deep liquidity for their tokens through Tarot lending pools as a managed service.

This program will also serve to increase borrowing activity in TAROT-based lending pools, thus increasing the Supply APRs paid to token lenders (including for xTAROT stakeholders).

A leveraged delta-neutral position earns trading fees and vault rewards, if any, while paying borrowing costs to maintain the position, as well as rebalancing costs in the form of transaction fees and realized impermanent loss (IL). The resulting yield is typically uncorrelated with the volatile token to be delta-hedged.

Specification

The changes we propose authorize the protocol to initiate a ΔnPOL Pilot Program, with up to $100,000 in LP token value for TAROT-based pairs (e.g., FTM/TAROT, USDC/TAROT) as initial collateral for one or more delta-neutral positions.