How Can a Short Perpetual Futures Contract Be Used to Create a Delta-Neutral Position for a Liquidity Provider?

A liquidity provider can create a delta-neutral position by shorting a perpetual futures contract for the volatile asset in their pool. First, the LP calculates the 'delta' of their position, which represents its sensitivity to the asset's price change.

They then open a short position on a derivatives exchange with a size that matches this delta. As the asset's price falls, the LP position incurs impermanent loss, but the short position gains in value, offsetting the loss.

Conversely, if the price rises, the LP position gains value while the short loses, again aiming for a neutral outcome.