Author: Alex Liu, Foresight News

Neutrl, a Stablecoin Protocol

On April 17, the synthetic dollar stablecoin project Neutrl announced the completion of a $5 million seed round financing, led by the digital asset private placement market STIX and venture capital firm Accomplice, with participation from Amber Group, SCB Limited, Figment Capital, Nascent, and angel investors including Ethena founder Guy Young and Arbelos Markets' derivatives trader Joshua Lim (recently acquired by FalconX).

Neutrl's product model is similar to the leading player in the field, Ethena, featuring a synthetic stablecoin NUSD pegged 1:1 to the dollar and an interest-generating asset sNUSD, corresponding to USDe and sUSDe, respectively. The difference lies in the source of revenue; Ethena's revenue comes from funding rate arbitrage in the crypto perpetual contract market, while Neutrl's revenue source is more aggressive: OTC token discount arbitrage.

Revenue Source: OTC Discount Arbitrage

Institutions like VC (venture capital) can acquire project tokens at undervalued prices that retail investors cannot access, and these tokens often come with stricter unlocking conditions. Generally, tokens have a lock-up period of six months to a year, followed by a linear release cycle of two to four years.

Lacking cash flow but with tokens still locked? Afraid that the token's value will significantly decline by the time it unlocks? Simply want to cash out quickly to enjoy life on a yacht or in a villa? OTC (Over The Counter) provides an option: sell the still-locked tokens at a discount in advance. The discount rate is related to the project quality and unlocking conditions but is usually quite high. For example, if a token unlocks after a year, the current OTC discount might be over 50%.

Neutrl uses the assets deposited by users to purchase discounted locked VC tokens while shorting an equivalent amount of tokens through contracts to achieve neutral risk (unrelated to revenue and token price fluctuations).

For example: buying 400,000 USD worth of tokens from the Mantra project token OM at a 60% discount before it crashes, assuming the tokens unlock in one year. At the same time, shorting 1 million USD worth of OM tokens through contracts. Ignoring contract funding rates and other complex factors, this effectively locks in a profit of 600,000 USD one year later.

Even if the OM token crashes 90% overnight, the 400,000 USD worth of OTC tokens approaches zero, but the short position profits 900,000 USD, directly closing the position shortens the profit realization cycle. If OM does not crash and rises 50% after a year, the short position incurs a loss of 500,000 USD, but the unlocked tokens are worth 1.5 million USD, thus locking in a profit of 600,000 USD.

Potential Risks: Is It a "Stablecoin"?

This strategy seems perfect, but it also has issues. Why wouldn't VCs hedge this position themselves instead of choosing to sell at a discount?

First, it cannot be ruled out that some VCs are indeed operating this way. However, the reality is that VCs are usually required to disclose which projects they have invested in and how the funds are used to LPs and investors. If investment institutions short their own positions, they might lose credibility. Additionally, VCs may hold more than 10% of a project's tokens, and the contract market may not be able to accommodate such a large short volume, forcing them to sell at a discount.

Moreover, this strategy faces two major risks: abnormal funding rates and significant token price increases.

Regarding funding rates: if too many people are shorting, the short sellers will continuously pay funding rates to the long positions. In extreme cases of negative funding rates, the daily funding rate could reach 10% of the principal. For OTC lock-up periods that can last a year or even four years, the funding rates paid may exceed the profits from the OTC discounts. Of course, in a bull market, positive funding rates can also bring additional profits.

If the token price rises significantly, more than double, "infinite margin" is needed to hold until the OTC tokens unlock to realize profits; otherwise, the short position may be liquidated midway, and if the token price subsequently drops again, only the actual loss from the short position remains. Not everyone can short the smooth declines of "W" and "MOVE"; if one shorts "TIA" and gets liquidated midway, it could end up being a loss.

Conclusion

Neutrl is backed by a high-risk strategy arbitrage. They may be more professional in risk management than ordinary investors, but the potential risks cannot be ignored.

This high-risk arbitrage fund absorbs user deposits under the guise of a stablecoin, which seems inappropriate and requires a stronger emphasis on risk. However, Ethena is essentially also an arbitrage fund disguised as a stablecoin. Without Ethena and Neutrl, retail investors would find it difficult to access the strategic returns behind them, marking an innovation and progress in the CeDeFi space, opening up more profit options for users.

Neutrl has not officially launched yet; you can visit the official website to submit a waitlist application for early access.

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