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This section provides the formal definitions and equations that underpin strategies built on Blend’s infrastructure. For the intuitive explanations, see Delta-Neutral Strategies and Synthetic Savings.

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Core Variables

VariableDefinition
AABase asset (e.g., USDC)
P0P_0Initial user principal in AA
CCCollateral asset (e.g., wstETH)
FFFlash loan size in AA
BBAmount borrowed against CC
qCqCUnits of CC supplied as collateral
SAS_APrice of base asset
α\alphaFraction allocated to USD strategies (~0.95)
β\betaFraction reserved as hedge margin (~0.05)

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Yield Optimization

The effective return is dynamically optimized across available strategies, maximizing risk-adjusted returns: rUSD(t)=max⁡i∈S{ri(t)σi(t)}r_{\text{USD}}(t) = \max_{i \in \mathcal{S}} \left\{ \frac{r_i(t)}{\sigma_i(t)} \right\} Where S\mathcal{S} is the set of available strategies, ri(t)r_i(t) is the return rate, and σi(t)\sigma_i(t) is the associated risk metric.

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Yield Scoring

Expected gross APY per venue is adjusted by incentive stability, liquidity depth, volatility, and borrow curve shape: 
Risk-adjusted score = gross yield - risk premia - execution costs

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Cost Model

  • On-chain gas (per chain) converted to base currency
  • Slippage estimate per path
  • Rebalance executes only if: benefit - cost ≥ threshold

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Implicit Leverage

The effective leverage on strategy-allocated capital is derived from the Loan-to-Value ratio: ℓ=FF−B=11−LTV\ell = \frac{F}{F - B} = \frac{1}{1 - \text{LTV}} For an LTV of 80%, the implicit leverage ℓ\ell is 5x.

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Delta Neutrality

The position delta Δ\Delta is the rate of change of portfolio value with respect to the base asset price SAS_A: Δ=∂∂SA(qC⋅SA−B⋅SA)=qC−B\Delta = \frac{\partial}{\partial S_A}(qC \cdot S_A - B \cdot S_A) = qC - B A position is delta-neutral when qC≈BqC \approx B and the collateral asset CC is closely correlated to the base asset AA.

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Net APR Model

The blended net APR combines the base vault return with the leveraged strategy spread: APRnet=x⋅rv+(1−x)⋅ℓ⋅rl\text{APR}_{\text{net}} = x \cdot r_v + (1 - x) \cdot \ell \cdot r_l
VariableDefinition
xxFraction of capital retained in vault
rvr_vVault APR (base return)
(1−x)(1-x)Fraction of capital in strategy
rlr_lStrategy spread APR (supply - borrow)
ℓ\ellEffective leverage on strategy portion

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Synthetic Overlay Mathematics

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Principal Allocation

For a user depositing principal P0P_0: PUSD=α⋅P0(USD strategies)P_{\text{USD}} = \alpha \cdot P_0 \quad \text{(USD strategies)} M=β⋅P0(hedge margin)M = \beta \cdot P_0 \quad \text{(hedge margin)} Where typically α≈0.95\alpha \approx 0.95 and β≈0.05\beta \approx 0.05.

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Notional Hedge Sizing

To replicate full exposure to a target asset, the notional hedge size must equal the principal: NUSD(t)=PUSD(t)N_{\text{USD}}(t) = P_{\text{USD}}(t) The equivalent position size in the target asset: NTarget(t)=PUSD(t)SUSD/Target(t)N_{\text{Target}}(t) = \frac{P_{\text{USD}}(t)}{S_{\text{USD/Target}}(t)} Where SUSD/Target(t)S_{\text{USD/Target}}(t) is the exchange rate (USD per unit of target asset).

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Portfolio Value in Target Denomination

VTarget(t)=PUSD(t)+ΔH(t)SUSD/Target(t)V_{\text{Target}}(t) = \frac{P_{\text{USD}}(t) + \Delta H(t)}{S_{\text{USD/Target}}(t)} Where ΔH(t)\Delta H(t) is the USD-denominated PnL of the hedge position.

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Total Return Decomposition

Rtotal(t)=rUSD(t)−f(t)+ΔH(t)PUSD(t)R_{\text{total}}(t) = r_{\text{USD}}(t) - f(t) + \frac{\Delta H(t)}{P_{\text{USD}}(t)}
ComponentWhat it is
rUSD(t)r_{\text{USD}}(t)Return from USD strategies
f(t)f(t)Funding rate on the perpetual position
ΔH(t)/PUSD(t)\Delta H(t) / P_{\text{USD}}(t)Capital gains from FX movement
Under interest rate parity, the net return approximates: rnet(t)=rUSD(t)−f(t)≈rTarget(t)r_{\text{net}}(t) = r_{\text{USD}}(t) - f(t) \approx r_{\text{Target}}(t)

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Margin Safety

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Margin Ratio

MR(t)=M(t)+ΔH(t)Mreq(t)\text{MR}(t) = \frac{M(t) + \Delta H(t)}{M_{\text{req}}(t)} Where M(t)+ΔH(t)M(t) + \Delta H(t) is the current margin balance (initial margin plus unrealized PnL) and Mreq(t)M_{\text{req}}(t) is the minimum margin requirement.

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Safety Buffer

The infrastructure enforces: MR(t)≥MRmin⁡+k⋅σMR\text{MR}(t) \geq \text{MR}_{\min} + k \cdot \sigma_{\text{MR}} Where k≥3k \geq 3 is the safety multiplier and σMR\sigma_{\text{MR}} is the standard deviation of margin ratio fluctuations.

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Automatic Deleveraging

When the margin ratio approaches the warning band, the hedge is scaled down: NUSDnew(t)=γ⋅NUSD(t),γ∈(0,1)N_{\text{USD}}^{\text{new}}(t) = \gamma \cdot N_{\text{USD}}(t), \quad \gamma \in (0, 1) Where γ\gamma is chosen to restore MR(t)>MRwarning\text{MR}(t) > \text{MR}_{\text{warning}}.

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Health Monitoring

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Individual Metrics

Market Pressure (Imbalance): I(t)=∣Flong(t)−Fshort(t)∣Flong(t)+Fshort(t)\mathcal{I}(t) = \frac{|F_{\text{long}}(t) - F_{\text{short}}(t)|}{F_{\text{long}}(t) + F_{\text{short}}(t)} Utilization Volatility: σU(t)=1∣W∣∑s∈W(U(s)−Uˉ)2\sigma_U(t) = \sqrt{\frac{1}{|W|} \sum_{s \in W} (U(s) - \bar{U})^2} Liquidity Concentration: C(t)=max⁡iAi(t)∑iAi(t)\mathcal{C}(t) = \frac{\max_i A_i(t)}{\sum_i A_i(t)} Execution Quality: Q(t)=1−∣Pexec−Pexpected∣Pexpected\mathcal{Q}(t) = 1 - \frac{|P_{\text{exec}} - P_{\text{expected}}|}{P_{\text{expected}}}

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Composite Health Score

Caution Mode activates when: H(t)=w1⋅I(t)+w2⋅σU(t)+w3⋅C(t)+w4⋅(1−Q(t))>θcaution\mathcal{H}(t) = w_1 \cdot \mathcal{I}(t) + w_2 \cdot \sigma_U(t) + w_3 \cdot \mathcal{C}(t) + w_4 \cdot (1 - \mathcal{Q}(t)) > \theta_{\text{caution}} Where wiw_i are weighting factors and θcaution\theta_{\text{caution}} is the caution threshold.

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Rebalancing Thresholds

  • Target bands per component: ±1-3%\pm 1\text{-}3\% deviation
  • Hysteresis to prevent oscillation
  • Execute only when: expected benefit - cost ≥ threshold
Exact parameters are Risk Architect and policy dependent. They may change over time based on market conditions.
Last modified on February 6, 2026