Funding Rates

Funding rates are the cornerstone of Stasis's yield generation strategy. Understanding how they work is essential to grasping how the protocol generates stable returns while maintaining market neutrality.

What are Funding Rates?

Definition

Funding rates are periodic payments exchanged between traders holding long and short positions in perpetual futures contracts. They serve as a mechanism to keep perpetual futures prices anchored to the underlying spot asset prices.

Purpose

  • Price Convergence: Keep futures prices close to spot prices

  • Market Balance: Incentivize traders to take positions that balance the market

  • Risk Premium: Compensate for the convenience of perpetual contracts

How Funding Rates Work

Basic Mechanism

When Futures > Spot: Positive funding rate → Longs pay shorts
When Futures < Spot: Negative funding rate → Shorts pay longs
When Futures = Spot: Zero funding rate → No payments

Calculation Components

Funding Rate = (Interest Rate Component + Premium Component) / Time Period

Where:
- Interest Rate Component ≈ 0% (for crypto markets)
- Premium Component = TWAP(Mark Price - Index Price) / Index Price
- Time Period = 8 hours (standard interval)

Payment Formula

Funding Payment = Position Notional × Funding Rate × (Time Held / Funding Period)

Market Dynamics

Why Funding Rates are Usually Positive

Retail Bias Toward Longs

  • Most retail traders prefer long positions (betting on price increases)

  • This creates excess demand for long positions

  • Shorts become scarce and demand compensation

Leverage Amplification

  • High leverage amplifies the cost of funding

  • Leveraged longs pay proportionally more

  • Creates sustainable income for short position holders

Psychological Factors

  • FOMO (Fear of Missing Out) drives long demand

  • "Number go up" mentality in crypto markets

  • Risk-seeking behavior in bull markets

Historical Patterns

Bull Markets

  • Funding Rates: 10-50% annualized

  • Frequency: Consistently positive

  • Volatility: High, with extreme spikes

Bear Markets

  • Funding Rates: 2-10% annualized

  • Frequency: Mostly positive, occasional negative

  • Volatility: Lower, more stable

Sideways Markets

  • Funding Rates: 5-15% annualized

  • Frequency: Regularly positive

  • Volatility: Moderate fluctuations

Stasis's Funding Rate Strategy

Position Structure

Strategy Components:
1. Hold USDC (spot exposure)
2. Short perpetual futures (hedge + funding income)
3. Maintain delta neutrality
4. Collect funding payments

Yield Generation Process

Step 1: Position Setup

  • Deploy USDC as collateral

  • Open short positions on Hyperliquid

  • Size positions to maintain delta neutrality

Step 2: Funding Collection

  • Receive funding payments every 8 hours

  • Payments automatically credited to account

  • No manual claiming required

Step 3: Compounding

  • Funding income increases vault value

  • rSTS exchange rate improves automatically

  • Users benefit from compound growth

Example Calculation

Vault Size: $1,000,000
Short Position: $800,000 notional (ETH + BTC)
Average Funding Rate: 0.01% per 8 hours

Daily Funding Income:
$800,000 × 0.01% × 3 = $240

Annual Funding Income:
$240 × 365 = $87,600 (8.76% APY on total vault)

Net APY to Users: ~6% (after fees and expenses)

Risk Factors

Funding Rate Risks

Rate Volatility

  • Funding rates can change rapidly

  • Market conditions affect rate stability

  • Extreme events can cause rate spikes

Negative Funding Periods

  • Shorts occasionally pay longs

  • Typically brief but can impact returns

  • Risk management procedures in place

Competition

  • More arbitrageurs can reduce opportunities

  • Institutional adoption may compress rates

  • Strategy capacity limitations

Mitigation Strategies

Diversification

  • Multiple assets (ETH, BTC, others)

  • Different funding rate patterns

  • Reduced concentration risk

Dynamic Positioning

  • Adjust position sizes based on rates

  • Reduce exposure during negative funding

  • Optimize for risk-adjusted returns

Risk Monitoring

  • Real-time funding rate tracking

  • Predictive models for rate changes

  • Automated risk controls

Market Efficiency and Opportunities

Why Opportunities Persist

Capital Requirements

  • Significant capital needed for meaningful returns

  • Operational complexity deters many participants

  • Risk management expertise required

Market Structure

  • Retail bias toward long positions continues

  • New participants enter markets regularly

  • Leverage demand remains strong

Technological Barriers

  • Sophisticated systems required

  • 24/7 monitoring and execution

  • Integration with multiple platforms

Competitive Landscape

Traditional Finance

  • Limited participation in crypto funding markets

  • Regulatory constraints

  • Technology adoption lag

Crypto Natives

  • Growing but still limited competition

  • Focus often on higher-risk strategies

  • Capacity constraints for large funds

Institutional Adoption

  • Increasing interest in delta-neutral strategies

  • Professional risk management standards

  • Long-term sustainability focus

Performance Metrics

Key Indicators

Funding Rate Capture

Capture Rate = Actual Funding Earned / Available Funding Rate
Target: >90% capture efficiency

Rate Prediction Accuracy

Prediction Error = |Predicted Rate - Actual Rate| / Actual Rate
Target: <10% average error

Risk-Adjusted Returns

Sharpe Ratio = (Return - Risk-Free Rate) / Volatility
Target: >1.5 for funding strategies

Monitoring Tools

Real-Time Dashboard

  • Current funding rates across assets

  • Historical rate trends

  • Predicted next funding rates

Performance Analytics

  • Funding income attribution

  • Strategy performance vs. benchmarks

  • Risk metrics and exposure tracking

Alert Systems

  • Unusual rate movements

  • Negative funding warnings

  • Rebalancing triggers

Future Outlook

Market Evolution

  • Increasing institutional participation

  • More sophisticated funding rate products

  • Potential for new yield sources

Technology Improvements

  • Better prediction models

  • Automated optimization

  • Enhanced risk management

Regulatory Considerations

  • Potential impact on perpetual futures

  • Compliance requirements

  • Market structure changes

Next: Yield Generation

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