Perpetual Swaps in DeFi: A Sneak Peak into Strips Finance
What is Futures Contract?
“Futures” are financial products that are “derived” from contracts to purchase a set position at a specific price in the future. When you enter a futures contract, you are agreeing with another party to transact an asset at a predetermined date and price. In other words, you are betting the asset’s future value, which results in either gaining or losing depending on where their position is at the expiration date of this contract.
For instance, both Micheal and Sarah entered ABC company’s futures position at $4,000 each, and they chose long and short positions, respectively. Now, let’s assume that the ABC company’s share is settled at $3,800 for each contract upon expiration. In this case, as Michael holds a long position, he has to pay the $200 deficit loss to the exchange ($4,000 – $3,800 = $200). On the other hand, Sarah, who holds a short position, will receive a profit of $200 from the exchange.
In May 2016, BitMex introduced a new product called XBTUSD perpetual swap. Unlike traditional futures contracts, the perpetual swap (or perpetual futures contracts) allows investors to trade futures “perpetually” with no expiration date, instantaneous settlement, and create leveraged positions through collateral.
One might ask if there’s no expiry, how does the futures position stay in line with the price of the underlying asset and not converge with spot upon exit?
Perpetual Funding Rate
Funding rates are the engine that keeps the futures price in line with the contract through the price difference between spot and futures markets. Periodically (depending on the exchange) the funding rate will be updated where long/short position holders will pay a rate % to each other depending on the market.
For example, Michael holds a LONG bitcoin (BTC) position of $100,000 at a funding rate of 0.01%. Michael will pay $10 to hold his position for the duration of the funding rate time period ($100,000 x 0.01% = $10). Michael’s funding rate payment would go to Sarah, who holds a short position of $100,000 for the duration of that period. If the funding rate were to turn negative, then the payout flow would be reversed with Sarah paying Michael.
8hr Funding Rates
Funding rates change often and can vary widely amongst different exchanges throughout crypto. The greater the premium/discount between the price of futures and the price of spot, the higher/lower the funding rate creating arbitrage opportunities for traders.
- Longs pushing spot price up -> higher funding rate -> enter a short position and receive funding rate while buying the spot position as price consolidates.
- Shorts pushing spot price down -> negative funding rate-> enter a long position and receive funding rate while selling spot as price consolidates.
Perpetual Funding Rate Swaps on Strips Finance
The Strips Finance Perp exchange enhances the trader’s ability to arbitrage off these funding rates simply with a click of a button. We understand that entering trades without proper position management often leads to expensive errors so we created a system for traders like us. Traders are equipped with technical analysis capable charts, 10x leveraging options, the most popular interest rates markets, and trading rewards mechanisms that grow the community.
We innovate by liberating the best TradFi strategies into DeFi and creating new opportunities for our fellow crypto pioneers.
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