Funding Rate Arbitrage

Funding rate arbitrage is the primary yield generation mechanism used by Stasis to earn stable returns. This strategy involves capturing the periodic payments (funding rates) that occur between long and short positions in perpetual futures markets.

Understanding Funding Rates

What are Funding Rates?

Funding rates are periodic payments between traders holding long and short positions in perpetual futures contracts. They serve to keep the futures price close to the underlying spot price.

Payment Direction

  • Positive Funding Rate: Long positions pay short positions

  • Negative Funding Rate: Short positions pay long positions

  • Zero Funding Rate: No payments between positions

Typical Market Conditions

In most cryptocurrency markets:

  • Bull Markets: High positive funding (longs pay shorts heavily)

  • Bear Markets: Moderate positive funding or occasional negative funding

  • Sideways Markets: Low to moderate positive funding

How Funding Rates Work

Calculation Formula

Funding Rate = (Interest Rate + Premium) / Funding Interval

Where:

  • Interest Rate: Usually close to 0% for crypto

  • Premium: Based on price difference between futures and spot

  • Funding Interval: Typically 8 hours (3 times per day)

Payment Mechanism

Funding Payment = Position Size × Funding Rate

Example Calculation

  • Position Size: $100,000 short ETH perpetual

  • Funding Rate: +0.05% (8-hour rate)

  • Payment Received: $100,000 × 0.05% = $50 every 8 hours

  • Daily Earnings: $50 × 3 = $150

  • Annualized: $150 × 365 = $54,750 (54.75% APY on this position)

Stasis Arbitrage Strategy

Strategy Overview

  1. Hold USDC: Maintain stable collateral base

  2. Short Perpetuals: Open short positions on Hyperliquid

  3. Collect Funding: Receive payments from long position holders

  4. Maintain Neutrality: Keep overall portfolio delta-neutral

Position Structure

Assets:
- USDC Holdings: $1,000,000
- Short ETH Perpetual: $500,000 notional
- Short BTC Perpetual: $300,000 notional
- Cash Buffer: $200,000

Net Delta: ~0 (market neutral)
Funding Exposure: $800,000 notional

Risk Management

  • Delta Hedging: Continuously monitor and adjust positions

  • Diversification: Spread across multiple assets (ETH, BTC, etc.)

  • Position Limits: Maximum exposure per asset

  • Liquidity Management: Maintain sufficient cash for operations

Yield Generation Process

Daily Operations

  1. Morning: Check overnight funding payments received

  2. Continuous: Monitor delta exposure and rebalance if needed

  3. Pre-Funding: Assess position sizes before funding events

  4. Post-Funding: Record payments and update vault value

Funding Schedule (Hyperliquid)

  • Funding Times: 00:00, 08:00, 16:00 UTC

  • Rate Calculation: Based on 8-hour TWAP premium

  • Payment Settlement: Automatic on Hyperliquid

Compounding Effect

Day 1: $1,000,000 vault value
Funding earned: $150 (0.015% daily)
Day 2: $1,000,150 vault value
Funding earned: $150.02 (compounding begins)
...
Year 1: ~$1,056,000 (5.6% APY with compounding)

Market Dynamics

Why Funding Rates Exist

  • Speculation: Retail traders often prefer long positions

  • Leverage: High leverage amplifies funding costs

  • Market Sentiment: Bullish sentiment increases long demand

  • Arbitrage Limits: Limited capital dedicated to funding arbitrage

Historical Performance

Typical funding rate ranges:

  • ETH: 5-15% annualized in normal markets

  • BTC: 3-10% annualized in normal markets

  • Alt Coins: 10-30% annualized (higher volatility)

Seasonal Patterns

  • Bull Runs: Extremely high positive funding (20-50% APY)

  • Bear Markets: Lower but still positive funding (2-8% APY)

  • Consolidation: Moderate funding (5-12% APY)

Risk Factors

Funding Rate Risks

  • Rate Volatility: Funding rates can change rapidly

  • Negative Funding: Occasional periods where shorts pay longs

  • Competition: More arbitrageurs can reduce opportunities

Operational Risks

  • Exchange Risk: Dependence on Hyperliquid platform

  • Liquidation Risk: Extreme price movements could trigger liquidations

  • Slippage: Large position changes may impact execution

Market Risks

  • Extreme Volatility: May require rapid position adjustments

  • Liquidity Crises: Could affect ability to maintain positions

  • Regulatory Changes: Potential impact on perpetual futures markets

Performance Optimization

Position Sizing

Optimal Leverage = f(Funding_Rate, Volatility, Risk_Tolerance)

Typical Range: 1.5x - 3x leverage on futures positions

Asset Selection

Priority factors:

  1. Funding Rate History: Consistent positive rates

  2. Liquidity: Sufficient market depth

  3. Volatility: Manageable price movements

  4. Exchange Support: Available on Hyperliquid

Timing Strategies

  • Rate Prediction: Anticipate funding rate changes

  • Position Adjustment: Optimize before funding events

  • Market Timing: Increase exposure during high funding periods

Monitoring and Reporting

Key Metrics

  • Funding Rate Capture: Percentage of available funding earned

  • Position Efficiency: Return per unit of risk taken

  • Delta Accuracy: How well neutrality is maintained

  • Sharpe Ratio: Risk-adjusted performance

Real-Time Tracking

Users can monitor:

  • Current funding rates across assets

  • Expected funding payments

  • Historical funding performance

  • Strategy attribution analysis

Next: Why use Stasis?

PreviousDelta-Neutral StrategyNextWhy use Stasis?