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