New Funding Rate Strategy

tongnk

Overview

Integrate with Perpetual Protocol and implement a market neutral funding strategy

Background

Market neutral funding strategies are fairly common and can be found executed on regular centralised exchanges. If you take an exchange like Binance where the funding rate is normally pegged to 0.01% (where positive means longs pay shorts) then a strategy would look like the following:

Short ETH in perpetual futures
Hold ETH

With this strategy you aren't exposed to any price fluctuations at all as they would cancel each other out. A regular strategy like this without leverage would be expected to yield ₁₀-15% on Binance currently

Strategy

Given the above outline of the basic strategy I propose we integrate with a defi protocol: http://perp.fi/

If we look at the funding rate (https://app.redash.io/perp/public/dashboards/rpCOTkyNbXOUsanfyi4HvcT5wgougGGhCMPa7GKS?p_WITHIN_DAYS=28) we can see that in the last 4 days in aggregate the fees earned were:

BTC/USDC: 0.097
ETH/USDC: 0.089

Given a time difference of 83 hours we do the following to get the annualised:

annualised_funding_rate = total_funding / 83 * 24 * 365 / 2

// Divide by 83 hours to get us average hourly rate
// Then multiple by 24 and 365 to get annualised rate
// Divide by 2 again as we assume 1x leverage here. 
// So we would need to hold 1 ETH worth of short in USDC and 1 ETH

Which leaves us with 514% and 472% respectively (if someone could double check my maths as it seems way too high right now)

I then charted this on a rolling 24 hour basis just to make sure we aren't having some numbers skew things too heavily and voila!
Trailing 24hr Funding Rate

Risks

There are probably a couple of risks I can see with this strategy:

If we use leveraged positions then we can increase the return but the risk of liquidations increases as well
How much we modify positions will eat into profits through fees (e.g. do we update the position everytime the funding rate swaps or do we use a moving average and change when that flips etc)
Relatively new protocol on mainnet though team have 2 audits + insurance coverage on 2 protocols on launch (which shows how much they care about security) as well as a capped ceiling for amount tradeable

Full disclosure: I am part of the Perpetual Protocol team and will obviously be biased

nottruner

You make a compelling argument. Seems pretty sound to me.

What would the level of effort be for the integration, and who will bear the bulk of the resource expense?

tongnk

There's probably 2 ways we can do this:

Governance votes in and Rari team implements
There is an existing bounty under "Strategy Implementation" here: https://bounties.perp.fi/ where other teams are able to implement. Though I suspect whoever this team would be would want certainty from Rari governance that the strategy once implemented would be made live

nottruner

Option 2 sounds preferable. Perhaps one could pass a governance vote to pre-accept the strategy once its developed and passes review.

RIP-3 passed so there is a clear path for the developing team to earn 33% of the gains from the implemented strategy.

JackLipstone

Thank you @tongnk for proposing this strategy! We have spent some time internally ideating around a similar framework. I would like to see some more feedback from the community before pushing towards a vote. Ultimately allowing a community member to develop this strategy in return for the bounty listed above + future fee split mechanism (RIP-3) would be a great step forward in terms of implementation and adding this to the Rari protocol!

teddy_swits

I agree with doing this through the RGT bounty. Would this integration boost returns in one or more pools, or be a stand-alone thing? I suspect the former, but should be clear in the proposal

tongnk

teddy_swits Depending on the implementation I guess you'll have differing sources of risk levels so it could be a stand alone pool or part of the existing one.