Funding Rate Arbitrage

Let's discuss the funding rate arbitrage strategy. Funding rate arbitrage is a trading strategy that takes advantage of the differences in funding rates across different markets. A key point of this strategy is being delta neutral. Delta neutral refers to a state or a situation where the overall directional exposure of a trader's positions is balanced or neutralized.
Here is a more detailed explanation.

How does it work?

  1. 1.
    Identifying markets with high funding rates: The first step is to identify markets that have a high funding rate in absolute value. in this strategy, we are looking for markets where the funding rate is significantly positive or negative. An easy view of all polynomial's markets can be found here: Example 1: let's say we identify a good opportunity on DOGE market, where the funding rate is around +0.01% per hour. Positive funding means short positions are payed by long. In this case we will short.
  1. 2.
    Finding another platform for opposite position: To complete, take advantage of the funding rate discrepancy and to be delta neutral, we need to find a platform to open a position on the opposite directions, possibly with a funding rate in our favour. Other platform can be cex or protocol that offer perps. Example 2: on Binance we find the same DOGE perpetual future with a 8 hour funding rate equal to -0.016%. We need to convert it in hours to have a good comparison; in this case dividing it by 8 we get a funding rate of -0.002% per hour.
  1. 3.
    Opening positions (long-short): It's the moment to open both the position, one long and one short, at the same time. Being fast on this operation helps to don't have movement on the price allowing to be delta neutral, limiting our exposure to volatile assets while farming the funding rate. Example 3a: now we can open the DOGE position on Polynomial (short) with funding +0.01% per hour and on Binance (long) with funding -0.002%/h. Example 4b: because we short the asset in the futures market on Polynomial (by selling DOGE contract), simultaneously we can instead buy the same asset in the spot market instead of.
  1. 4.
    Farming the funding rate: By holding these positions open during the funding period, we earn the funding rate as profit. Example 4a: if the funding period lasts for one day, holding the positions for that duration would result in a net gain of 0.24% (0.01%*24h) on Polynomial and a net gain of 0.048% on Binance. Example 4b: if the funding period lasts for one day, holding the positions for that duration would result in a net gain of 0.24% (0.01%*24h) on Polynomial meanwhile the spot position can be used to farm something else in (eg. in case of ETH could be lent or staked).
  1. 5.
    Considering open interest: Open Interest, representing the total number of open contracts in a market, plays a crucial role impacting the funding rate calculation. Higher Open Interest generally leads to more significant funding rates. Traders monitor changes in Open Interest to understand the dynamics and potential shifts in funding rates across markets.
NOTE: this procedure is for informational purposes only, and before making any decisions, it is advisable to fully understand the dynamics behind it (DYOR). If you have any other strategies in mind, please feel free to share and discuss them on Discord.