# Stability through Delta-Neutrality

UXD is a stablecoin that is backed by a delta-neutral position derivatives position. In this section, we will explain how a delta-neutral position provides stability to the UXD stablecoin.

As explained in our section on Delta, a position is said to be "

**Delta-Neutral"**with respect to some asset if the value of the position does not depend on the value of that asset. In other words, a position is usually said to be delta-neutral if it utilizes multiple balancing long and short positions so that the overall position has zero delta-exposure. A delta-neutral position finds stability in this balancing effect of long and short positions, which balance out to ensure price stability.An example is illustrative. Suppose you are long $100 of BTC (you own $100 of BTC) and at the same time open a short of $100 of BTC through a Perpetual Future. This portfolio is initially worth $100, from the $100 of BTC you hold. What happens to the profit and loss of this portfolio as the price of BTC changes?

Suppose BTC goes up by $1. Then, the long position (owned BTC) is now worth $1 more. But, the short position is worth $1 less by definition. So, the overall portfolio is worth $100 + $1 (gain from long) - $1 (loss from short) = $100.

**The value of the overall portfolio has not changed, it's still worth $100, even though the price of BTC has changed.**And this brings us back to our definition of delta-neutrality: the value of the position does not depend on the value of the asset. If BTC goes up in value, the long goes up in value but the short goes down by the same amount. If BTC goes down, the short goes up in value but the long goes down by the same amount.

**Delta-neutrality is stability.**UXD, a stablecoin, derives its stability from the property of being delta-neutral. Here's how:

A user deposits an asset, such as $100 of SOL. UXD Protocol enters into a corresponding short Perpetual Future position on a derivative exchange, such as mango markets. This position is the same as the BTC position described above, and will maintain its $100 value in the same way.

100 UXD stablecoin* is issued to the user for dollar amount of SOL the user deposited. This 100 UXD represents the underlying delta-neutral position, which is by definition always worth $100. In this way, UXD is 100% collateralized and can be redeemed at any time for $100 of crypto assets. In this example, a user could deposit 100 UXD in exchange for $100 of SOL*.

**Less trading fees. UXD does not take any protocol fees. Any fees/slippage from minting are due to the underlying derivative exchanges.*

Please see the Risks section of the docs to understand the ways in which UXD may become de-pegged from its $1 USD peg.

By nature of the perpetual futures position, the delta-neutral position backing a UXD stablecoin generates/pays interest depending on market conditions. This yield is due to the funding rate of perpetual futures.

When the funding rate is positive, the interest will be distributed to UXD Protocol Stakeholders and the insurance fund. When the funding rate is negative, the insurance fund will be used to pay out the negative funding rate so that UXD holders do not have to pay out interest.

Last modified 10mo ago