Deep dive into Delta Neutral Vaults on Umami and the Skew Farming Strat.

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The skew farming mechanic is rather interesting but it does seem fairly complex, with a lot of hidden effects that aren't very clearly explained. Will need to dig more into the details, and will see if there is historical data about the pools upkeep via their API.

As for Umami Finance, from what I gather, they're trying to look for partners to take both sides. USDC Vault on Umami + Providing Liquidity on the Hedge on Tracer.

Their position on Tracer will be in the short pools as a hedge for whatever they're doing on GLP. If they skew the short pool too much, the effective gains on their hedge will fall below baseline leverage, while losses will remain at baseline. So the attraction here is by taking the other side of the position, you get to benefit from the skew in the short term. Given that this is a structural flow of sorts, agree that is definitely exploitable for farming alpha given how much they can potentially skew the 'skew', though it does come with some key operational considerations namely:

1. Rebalancing on a CEX - seems like this is hourly
2. Volatility of the skew - from their docs, it seems that skew can flip from favouring longs to favouring shorts quite quickly. Rebalancing would also need to factor flipping from long pool positions to shorts, and that is a cost that I haven't seen modeled for now.
3. Volatility decay - while v2 pools might have mitigated this issue somewhat, basically this drags pnl down in rangey markets. Think of this as a constant dilution of your gains and amplification of losses due to rebalancing.

Key questions I want to find out would be:

1. If the skew ever flips to favour shorts, will there be a commitment to continue participating in the long side? (quite key)
2. What kind of effective gain are they targeting?
3. Given that in their best case for attracting TVL, skew will generally lean to favour longs. How is it advantageous for them to use Tracer's pools when traditional leverage would be a better hedge (assume they chose Tracer due to no liquidations, but let's see what they say).

Actually, there could be some interesting strategies to exploit via using options as a way to maintain delta neutrality instead of spot or perps.

1. Enter the pool with large effective gains. E.g. enter the 10S ETH pool, which has an effective gain of 15.7x now vs. 10x on losses only. E.g. deposit enough so that we get a 10 ETH equivalent exposure
2. Go 'Delta Neutral' via buying a call on Deribit e.g. ETH-29JUL-1600C, which has a delta of 42%. Size the initial delta to 10 ETH, which means the contract notional would be 10/0.42 = approx 23.8 ETH. Pay $64*23.8 = $1523.20 (usually margined).

Spot ETH is about 1500 now. If spot ETH goes to 1600, the losses on the short would be 100x10 = $1000. Gains on the option delta would be magnified due to convexity, which is roughly 100x0.50x23.8 = $1190