Risks of the JLP Delta Neutral Strategy
We all love making money, and while the JLP Delta Neutral strategy is a smart, low-risk way to boost returns, no strategy is entirely risk-free.
In this article, we’ll break down the potential risks you should be aware of before diving in.
Counterparty Risk on JLP Itself
The JLP token represents an index of assets (SOL, BTC, ETH, USDT, USDC) with varying weightings, but what would happen if it were compromised?
If the JLP pool were to experience a drain — whether through hacking or operational mishaps — it could cause the token to lose its peg to its true value, significantly impacting your position.
JLP Contract Address:
27G8MtK7VtTcCHkpASjSDdkWWYfoqT6ggEuKidVJidD4
Counterparty Risk on Drift’s Perpetuals Liquidity and Settlement
The Drift exchange, the backbone of our perpetual swaps, isn’t immune to liquidity crunches.
In high-stress market conditions, liquidity can dry up, making it harder to execute trades at favorable prices. Even worse, settlement failures could leave positions in limbo, causing losses or delays.
Then there’s the bigger picture: Drift’s overall financial health. If the exchange faces solvency issues, the funds sitting in their accounts could be at risk. And if their lending pool becomes strained — whether from defaults or excessive leverage — it could trigger a wave of bad debt that spreads through the system, impacting every trader connected to the platform.
Operational Risks with Delta Calculation
There’s also the possibility of technical failures. The strategy relies on precise delta calculations, and any bugs in RPC calls or system outages could disrupt this process.
If the delta isn’t calculated or adjusted in real-time, the position may move from being market-neutral, leaving you exposed to price movements.
Market Risks Linked to JLP’s Peg
Another risk lies in the price stability of JLP itself.
If the market price of JLP diverges sharply from its virtual price — and the mint/burn mechanism intended to stabilize it isn’t functioning properly — this could cause serious discrepancies, leading to losses.
In a highly unlikely scenario where JLP drops in value by 99%, while the underlying assets remain stable, there could be massive liquidation risks.
This type of scenario could only occur if the JLP pool is drained, but it’s a risk that needs to be acknowledged.
Q: What if the team rug?
A: The team can’t access or withdraw your funds — your assets are securely held in a Drift delegated vault, meaning you maintain full control. The team only has trading privileges, not custody of your money.
Q: What if we get liquidated?
A: We can’t get liquidated for several reasons. First, we perfectly hedge our JLP delta exposure, resulting in a historical maximum account drawdown of around just 2% when the strategy is unlevered. Second, we dynamically deleverage whenever there is even a slight risk of liquidation.
Q: What if our hedge short positions rise significantly? Wouldn’t that put us at risk of liquidation?
A: No, it won’t, because our underlying collateral (JLP) increases in value as well.
Q: Can you in theory manipulate a low-liquidity shitcoin on Drift to execute a pump-and-dump and drain funds?
A: No, we are not able to do that because we are limited to trading only the tokens listed on Drift.
Keep these main risks in mind when utilizing JLP Delta Neutral vaults. Wishing you great yields ahead!
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