Funding Rate Arbitrage for Dummies:
My Longest Thread Ever
π§΅π
My Longest Thread Ever
π§΅π
1/
The basic idea:
1. Have equal long & short position
2. Collect funding rate interest
Questions:
β’ What is funding rate?
β’ Where does it come from?
β’ How can you open a FR Arb position?
β’ Which tools help us pick a good position?
β’ When should you close your position?
The basic idea:
1. Have equal long & short position
2. Collect funding rate interest
Questions:
β’ What is funding rate?
β’ Where does it come from?
β’ How can you open a FR Arb position?
β’ Which tools help us pick a good position?
β’ When should you close your position?
2/
Funding rates incentivize keeping and asset's mark price on an exchange close to its index price.
Mark Price: Current contract price on exchange
Index Price: Averaged price amongst major exchanges
It get's much more complicated, that's for another day.
Funding rates incentivize keeping and asset's mark price on an exchange close to its index price.
Mark Price: Current contract price on exchange
Index Price: Averaged price amongst major exchanges
It get's much more complicated, that's for another day.
3/
With perpetuals, you either pay or receive funding:
Mark Price > Index Price = Positive Funding Rate
Positive Funding Rate = Longs Pay Shorts
Mark Price < Index Price = Negative Funding Rate
Negative Funding Rate = Shorts Pay Longs
With perpetuals, you either pay or receive funding:
Mark Price > Index Price = Positive Funding Rate
Positive Funding Rate = Longs Pay Shorts
Mark Price < Index Price = Negative Funding Rate
Negative Funding Rate = Shorts Pay Longs
4/
We've covered a lot.
Let's get our hands dirty.
$Matic has positive funding on @perpprotocol on average.
Below we see hourly funding for the past couple months, annualized.
Because most data points are >0 (highlighted in green) longs are generally paying shorts.
We've covered a lot.
Let's get our hands dirty.
$Matic has positive funding on @perpprotocol on average.
Below we see hourly funding for the past couple months, annualized.
Because most data points are >0 (highlighted in green) longs are generally paying shorts.
5/
The chart above is from perp.com.
Unfortunately, they don't give us historical averages.
Fortunately, @r72_fi has historical averages for @perpprotocol.
Matic had a monthly gain of 2.71% in funding on shorts. Annualized, that's 33%.
r72.fi
The chart above is from perp.com.
Unfortunately, they don't give us historical averages.
Fortunately, @r72_fi has historical averages for @perpprotocol.
Matic had a monthly gain of 2.71% in funding on shorts. Annualized, that's 33%.
r72.fi
6/
So you can get paid 3-30% on $Matic shorts @ 1x leverage.
Reminder, funding is usually paid in stables & added to collateral.
Cool. BUT:
βΌ How do you open a position?
βΌ What do you do with the long?
βΌ How does leverage affect funding rate?
Great questions!
So you can get paid 3-30% on $Matic shorts @ 1x leverage.
Reminder, funding is usually paid in stables & added to collateral.
Cool. BUT:
βΌ How do you open a position?
βΌ What do you do with the long?
βΌ How does leverage affect funding rate?
Great questions!
7/
How do you open a position?
This varies between platforms.
On CEXs:
1. Transfer Money to Futures Account
2. Type in amount of Matic to short
3. Choose leverage
4. Open position
5. (to be neutral) Buy the same amount of Matic
@kucoincom for reference.
How do you open a position?
This varies between platforms.
On CEXs:
1. Transfer Money to Futures Account
2. Type in amount of Matic to short
3. Choose leverage
4. Open position
5. (to be neutral) Buy the same amount of Matic
@kucoincom for reference.
9/
Other protocols (@GMX_IO, @GainsNetwork_io, @PikaProtocol, e.g.) function more like CEXs; you preselect your leverage, and your margin is isolated.
Generally, those use liquidity vaults (GLP, Dai, USDC) and FR Arbitrage is not as viable.
Some have no funding rates at all.
Other protocols (@GMX_IO, @GainsNetwork_io, @PikaProtocol, e.g.) function more like CEXs; you preselect your leverage, and your margin is isolated.
Generally, those use liquidity vaults (GLP, Dai, USDC) and FR Arbitrage is not as viable.
Some have no funding rates at all.
10/
What do you do with the long?
Easy, go farm it.
Get a yield on it; hooray capital efficiency!
To avoid impermanent loss, I'd recommend stable LPs that use a liquid-staked derivative
(stMatic-Matic, e.g.).
This avoids 99% of IL and yields can be pretty good.
What do you do with the long?
Easy, go farm it.
Get a yield on it; hooray capital efficiency!
To avoid impermanent loss, I'd recommend stable LPs that use a liquid-staked derivative
(stMatic-Matic, e.g.).
This avoids 99% of IL and yields can be pretty good.
11/
How does leverage affect funding rate?
Funding rate gets multiplied by leverage.
2x leverage, 2x funding rate.
So a 25% yield becomes a 75% yield at 3x leverage.
I only use 2x leverage, because I'm bald enough already.
Don't need that kind of stress in my life.
How does leverage affect funding rate?
Funding rate gets multiplied by leverage.
2x leverage, 2x funding rate.
So a 25% yield becomes a 75% yield at 3x leverage.
I only use 2x leverage, because I'm bald enough already.
Don't need that kind of stress in my life.
12/
Let's pause for maths.
If we short and long $100 of Matic:
Short at 2x leverage (what I like)
Cost: $50
Yield: 6-60% APY
Average APY: ~20% @ 2x
Yearly Estimate: $10
Long stMatic-Matic
Cost: $100
Yield: ~20%
Yearly Estimate: $20
Total APY: 20% ($30 yield / $150 principal)
Let's pause for maths.
If we short and long $100 of Matic:
Short at 2x leverage (what I like)
Cost: $50
Yield: 6-60% APY
Average APY: ~20% @ 2x
Yearly Estimate: $10
Long stMatic-Matic
Cost: $100
Yield: ~20%
Yearly Estimate: $20
Total APY: 20% ($30 yield / $150 principal)
13/
What tools can help you pick a good position?
β @coinglass_com
β @r72_fi
β This tool my community (DeFi Dojo) has made:
tinyurl.com
β @DuneAnalytics
Pictures: a Pika example for Dune
My community has actually made a few other cool tools for FR Arb.
What tools can help you pick a good position?
β @coinglass_com
β @r72_fi
β This tool my community (DeFi Dojo) has made:
tinyurl.com
β @DuneAnalytics
Pictures: a Pika example for Dune
My community has actually made a few other cool tools for FR Arb.
14/
When should you exit your position?
It sucks when the funding rate flips, but there's a silver lining.
If the funding rate has flipped, that means you //might// be able to exit at a premium.
Example up nextπ
When should you exit your position?
It sucks when the funding rate flips, but there's a silver lining.
If the funding rate has flipped, that means you //might// be able to exit at a premium.
Example up nextπ
15/
Exit Example
If you had a short open & now mark < index, this means a few things:
1. Shorts are paying longs
2. The price on that asset is lower than it should be
3. Your short is worth more than it should be
4. You can exit at a premium
Exit Example
If you had a short open & now mark < index, this means a few things:
1. Shorts are paying longs
2. The price on that asset is lower than it should be
3. Your short is worth more than it should be
4. You can exit at a premium
16/
I love funding rate arbitrage.
Here are all of the current and historical ROI's I've gotten.
If I get 5% ROI on a position, I generally consider that a home run.
When FR flips, I try to exit at a premium.
You can also (usually) buy long perps to close shorts.
I love funding rate arbitrage.
Here are all of the current and historical ROI's I've gotten.
If I get 5% ROI on a position, I generally consider that a home run.
When FR flips, I try to exit at a premium.
You can also (usually) buy long perps to close shorts.
17/
Finally,
It's important to understand how the SIZE of your position will affect funding rate and opening price.
Here's an example where a $15K short opens -4% from mark.
At 2x leverage, you'd start off 8% down on your short.
Finally,
It's important to understand how the SIZE of your position will affect funding rate and opening price.
Here's an example where a $15K short opens -4% from mark.
At 2x leverage, you'd start off 8% down on your short.
18/
We talk about these strategies all day long in the DeFi Dojo Discord.
β£ We have a FR Arb Thread in our Forums.
β£ We have a Perps channel.
β£ We have a Delta Neutral channel.
And we also have team members from a handful of perpetual protocols who frequent our discord.
We talk about these strategies all day long in the DeFi Dojo Discord.
β£ We have a FR Arb Thread in our Forums.
β£ We have a Perps channel.
β£ We have a Delta Neutral channel.
And we also have team members from a handful of perpetual protocols who frequent our discord.
20/
So join my Discord, get the first month free.
If you don't like it, leave without paying a dime.
Check out my portfolio, talk to >1,000 premium members & DeFi Power Users, or talk to some of your favorite DeFi teams.
We'll be happy to have you.
launchpass.com
So join my Discord, get the first month free.
If you don't like it, leave without paying a dime.
Check out my portfolio, talk to >1,000 premium members & DeFi Power Users, or talk to some of your favorite DeFi teams.
We'll be happy to have you.
launchpass.com
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