Delta Neutral Hedging

Phase 1: USDe Backing

In order to bootstrap and accelerate our launch, Bamk.fi's NUSD is backed 1:1 by Ethena's USDe in phase 1 which uses a similar delta-neutral position as the Nakamoto Dollar will use in Phase 2.

Enabling this bootstrap allows us to immediately start growing TVL in an organic way. Phase 1 reliance on Ethena will be temporary as we further build out the infrastructure to execute our delta-neutral hedging program.

First is First

Since the inception of Ordinals on Bitcoin the idea for a stablecoin has been regularly shared. Several teams have attempted to create one but the only functioning ones we have seen are built on BTC L2s.

Bamk.fi wanted to get the Nakamoto Dollar circulating on L1 as soon as possible. So we decided to bootstrap in this way.

BRC20-5byte vs Runes

The initial choice to start $NUSD on BRC20-5byte was because the upgrade was specifically intended for stablecoin projects. Tickers could be deployed without a max supply and issuance was only possible from the holder of the deployer inscription.

On Runes there is no option for an infinite supply ticker where the deployer can control the issuance. So it was decided to etch the NUSD•NUSD•NUSD•NUSD Rune with a supply of 2.1 quadrillion, matching the number of satoshis of Bitcoin.

We are keeping updated on other Bitcoin L1 protocols and will assess whether to deploy NUSD on other protocols.

Phase 2: Delta Neutral Hedging

Bamk.fi plans to execute the delta-neutral hedging program only through onchain perpetual swaps. We are carefully monitoring trading volumes and Open Interest of various perpetual DEXes on several blockchains.

Longer-term the development of the Nakamoto Index will provide onchain prices not requiring any centralized third-party oracles and enable onchain perpetual swaps on Bitcoin itself.

We see onchain perps volume exceeding centralized exchange perp volume in the future by orders of magnitude.

Enabling hedging directly onchain means we mitigate the largest risk factor in the creation of synthetic dollars - centralized exchange custody risk.

This further enables all positions to be transparent to the world at all times. Users can see actual positions being opened or closed by the Bamk.fi protocol.

Delta-Neutral Position

In finance, a delta-neutral portfolio means despite the assets you hold going up and down in price, your portfolio value remains the same.

Easiest explained with an example:

BTC/USD is trading at $69,000

Your portfolio holds $10,000 worth of BTC (~0.14492 BTC).

You want to keep your portfolio delta-neutral so you open a BTC short position worth $10,000 on the perpetuals pair.

Now whether BTC goes to $150,000 or $20,000, your portfolio will still remain valued at $10,000

You are going both long and short in equal amounts, simultaneously. This in effect cancels both positions out so you remain neutral.

Synthetic Dollar

The ability to keep your $10,000 BTC portfolio delta-neutral means you can take your same portfolio and use it as backing for $10,000 worth of synthetic dollars. This is what the Nakamoto Dollar (NUSD) is.

Bamk.fi receives BTC from people who want to mint NUSD. Bamk.fi then opens an equally sized position going short BTC on the perpetuals pair. This creates the delta-neutral position. Bamk.fi can then issue fresh NUSD and have it be backed by the delta-neutral portfolio.

Bitcoin Bond and the Funding Rate

When a perpetuals position is opened, something called the funding rate dictates whether long positions are paying shorts, or whether short positions are paying longs.

Over 74% of the time, long positions are paying shorts. The amount they pay can vary a lot, from 5% to 150% APY, depending on market supply and demand.

To continue with the example above, when your portfolio of $10,000 BTC becomes delta-neutral, you will 74% of the time be receiving a yield because of your $10,000 short perpetuals position.

This means the issuance of Nakamoto Dollars comes with it's own native yield - the Bitcoin bond.

There are further nuances to this, when the funding rate turns negative and short positions have to pay long positions. But with a reserve fund and careful risk management policies this can be mitigated.