Funding Arbitrage Guide

How does it work?

Funding Arbitrage works with just one click, allowing users to open a long position on Aave and a short position on Polynomial simultaneously. This dynamic creates an opportunity to generate yields by capitalizing on the discrepancy between interest and funding rates on the two platforms.

Step 0: Before to start

Check the funding rate value on the dashboard. Funding Arbitrage v1 currently supports shorting ETH on Polynomial and longing on Aave. To ensure a positive yield, the funding rate must be positive.

Step 1: Fund your SW

After connecting your wallet, deposit sUSD into the Smart Wallet.

Step 2: Managing Risk

With your funds in place, you can now choose the margin amount and leverage. The leverage is capped at x5 since Funding Arbitrage is built on top of Aave.

With an initial deposit of $1,000, users can potentially borrow up to $5,000. Aave's liquidation price is calculated differently from Polynomial as it employs a Loan To Value (LTV) approach, dividing the loan amount by the value of the collateral. Max LTV sUSD: 80% Liquidation threshold: 82.5%

Step 3: Start

Once all parameters are set, users can open trades with a single click, resulting in two simultaneous actions:

  • Short ETH: A short position on Polynomial Trade is initiated, utilizing a portion of the initial margin.

  • Long ETH: Creating a long position involves three steps:

    1. The remaining sUSD is used for a flash loan on Aave to borrow the necessary amount of sUSD;

    2. The borrowed sUSD is then swapped for ETH;

    3. The ETH is deposited on Aave, and sUSD is borrowed to repay the flash loan.

After opening positions, users can track different information.

  • Polynomial: Funding Rate, Funding Velocity, OI

  • Aave: Supply and Borrow APR & Size

Every position shows also liquidation price, PnL and other key metrics.