💻Overview
High-level description
Hedgehog is an automated trading strategy that by a combination of providing liquidity (LPing) for the ETH-USDC pool and hedging its impermanent losses with LPing for the oSQTH-ETH pool on Uniswap V3 creates a synthetic yield-bearing ETH portfolio, that earns trading fees from LP on Uni V3, while still keeping linear ETH exposure.
An algorithm splits all the available tokens and deposits them in a particular proportion to the liquidity pools.
To adapt to the different market conditions (historical and expected price fluctuations), the strategy reacts by adjusting its parameters (weight and liquidity ranges) based on the observed implied volatility (IV), by performing so-called volatility arbitrage.
For example, as IV is clearly a mean-reverting process (the value tending to its mean) when the strategy observes a high IV in the market, it expects that during the next period, between rebalances, the IV will decrease, thus we adjust the ranges with respect to this expectation. And vice versa, during the low IV environment in the market, we expect that further IV will increase, so we are optimizing the payoff curve expecting such a volatility jump.
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