How USDF works

Delta-neutral strategy and capital flows

USDF offers a decentralized and yield-bearing alternative to traditional stablecoins. Innovative mechanisms ensure stability, risk management, and revenue generation for holders. A critical component of USDF's operation is its integration of a low-risk delta-neutral strategy. Below, we’ll explain how USDF works, the flow of funds, and the delta-neutral positions used to generate revenue.

1. Capital flow process for USDF

The process of minting and using USDF is simple and transparent.

Step 1: Minting USDF

Mint USDF with USDT (Tether) at a 1:1 ratio. For example, 100 USDT mints 100 USDF. Once the USDF is minted, the capital moves into a managed process to generate yield.

Step 2: Transfer to Ceffu Wallet

After the mint, corresponding USDT funds are transferred to a Ceffu wallet. The Ceffu wallet is a custodial wallet, keeping the USDT secure on behalf of Aster and to prepare for deployment in a yield-generating strategy. This wallet plays a critical role in the management of the funds.

Step 3: Opening a position on Binance

The funds in the Ceffu wallet are then sent to Binance, one of the largest cryptocurrency exchanges, to open positions in a carefully managed strategy. Binance is chosen due to its liquidity, efficiency, and support for various trading strategies. The goal is to use these funds for low-risk trading or other revenue-generating opportunities that can provide consistent returns.

Step 4: Weekly profit distribution

The profits generated from the trades and strategies employed on Binance are accumulated over a week. Each week, the yield generated is calculated and then distributed to the asUSDF contract. asUSDF is the staked version of USDF, and holders can lock their USDF to receive yield over time. This staking mechanism lets holders earn passive income in addition to the stability USDF provides.

Here’s a simplified flowchart illustrating the process:

2. Delta-neutral strategy for fee generation

One of the core strategies employed by USDF to generate returns is the delta-neutral strategy. This strategy helps maintain stability and minimize exposure to market volatility, while still allowing holders to earn rewards.

What is a delta-neutral strategy?

A delta-neutral strategy involves holding both long and short positions. The goal is to neutralize or balance out the effect of price changes so that no matter which direction the market moves, the overall position remains relatively unchanged in terms of value.

For example, funds could be used in perpetual trading on platforms like Binance. By carefully balancing long and short positions, the strategy ensures that profits are made through the fee generation and the cost of trades, rather than relying solely on price appreciation.

How does the USDF delta-neutral strategy generate revenue?

The key revenue sources come from:

1. Trading Fees: Binance, like many exchanges, charges a fee for opening and closing positions. By using a delta-neutral strategy, USDF generates revenue from these fees while reducing risk exposure.

2. Interest Rate Differentials: In cases where leverage is used in trading, USDF can benefit from interest rate differences between various crypto assets or trading pairs, allowing it to generate more income while maintaining a neutral market stance.

3. Stability of Returns: Since the strategy aims to mitigate market volatility, it offers a more stable return profile. Unlike other strategies that are heavily reliant on directional market moves (either up or down), the delta-neutral approach ensures that even in uncertain or bearish market conditions, the system can continue to generate returns for holders.

How the delta-neutral strategy works for USDF:

USDF funds deposited into Binance are used to buy spot and short perpetual positions on a specific asset, such as Bitcoin (BTC) or Ether (ETH). Buying spot is effectively ‘long-ing’, and it profits when the price of assets increases. On the other hand, the short position profits when the price decreases. Because these counterbalance each other, the overall net position remains neutral (or close to neutral) in terms of market exposure.

This means that USDF can generate consistent fee income, regardless of asset price movements, making the strategy less sensitive to market volatility. The value of USDF stays consistent, with any gains or losses being offset by the balanced positions.