Funding Rate Vault
Tokenized Delta-Neutral Funding Rate Arbitrage
Overview
The frUSDC vault captures funding rate payments from perpetual futures markets while maintaining zero directional exposure. The strategy profits regardless of market direction by holding offsetting spot and perpetual positions.
How It Works
Delta-Neutral Strategy
Position Structure:
Buy spot asset (e.g., ETH)
Short equal perpetual position on Drake
Net market exposure: Zero
Price Movement Example:
ETH rises $2,000 → $2,200 (+10%):
Spot gain: +$2,000
Perpetual loss: -$2,000
Net: $0
ETH drops $2,000 → $1,800 (-10%):
Spot loss: -$2,000
Perpetual gain: +$2,000
Net: $0
Funding income continues regardless of directionFunding Collection
Mechanism:
Perpetuals trade at premium/discount to spot
Funding payments every 8 hours balance prices
Majority side pays minority side
Vault receives payments automatically
Direction:
Long-biased market → Vault receives funding from longs
Short-biased market → Vault exits or rotates positions
Balanced market → Lower but consistent funding
Yield Generation
Simulated Returns by Market Condition
Bull Markets (High Funding):
Rate: 0.10-0.30% per 8-hour period
Annual: 30-100% APR
Driven by: Strong long demand paying shortsSideways Markets (Moderate Funding):
Rate: 0.01-0.05% per 8-hour period
Annual: 10-30% APR
Driven by: Balanced positioningBear Markets (Low/Negative Funding):
Vault exits positions or rotates to positive rates
Maintains capital preservation focusCalculation Example
Vault: $1,000,000
Deployed: $950,000 (95% utilization)
Rate: 0.08% per 8-hour period
Daily: $950k × 0.08% × 3 = $2,280
Monthly: $68,400
Annual: $820,800 (82% APR on deployed capital)
Effective APR: 78% (accounting for 5% reserve)Automation
Market Scanning:
Monitors all instruments continuously
Identifies highest funding rates
Checks liquidity and oracle stability
Position Management:
Enters when funding >0.05% per period
Exits when funding <0.03% per period
Rotates to higher opportunities
Rebalances as vault size changes
Capital Efficiency:
90-95% capital deployed
Spot holdings collateralize perpetual positions
Up to 3x leverage when rates justify
Automatic compounding
Risk Controls
Position Limits
Maximum 30% per instrument
Diversification across 3-5 markets
Prevents concentration risk
Funding Thresholds
Entry: >0.05% per period minimum
Exit: <0.03% per period trigger
Ensures adequate returns vs costs
Basis Risk Management
Positions sized for 20% adverse moves
Rebalancing at 2% divergence
Liquidation protection maintained
Emergency exit procedures
Oracle Redundancy
Multiple price sources (Pyth, Chainlink)
Divergence monitoring
Automatic alerts
Failsafe mechanisms
Liquidity Requirements
$50k minimum depth within 0.5% of mid
AMM capacity verification
Slippage limits on both legs
Staged execution for large positions
Share Token (frUSDC)
Mechanics:
Deposit USDC → Receive frUSDC shares
Share price appreciates with funding income
Redeem frUSDC → Receive USDC
Example:
Day 1: $1.00 per share
Day 30: $1.065 per share (6.5% monthly)
Annual equivalent: ~113% APRComposability:
Use as collateral in other protocols
Provide liquidity in AMM pools
Transfer freely between addresses
Standard ERC-20 functionality
Withdrawal Process
Standard two-step redemption:
Request: Submit redemption, shares frozen
Execute: After 24-hour delay, burn shares for USDC
Delay prevents rapid withdrawals during market stress.
Risk Summary
Funding Reversal: Prolonged negative funding reduces returns. Vault exits positions to preserve capital.
Basis Risk: Temporary spot-perpetual divergence creates unrealized losses. Positions sized conservatively to manage.
Smart Contract: Multiple interactions increase surface area. Mitigated through audits and testing.
Oracle Dependency: Requires accurate pricing. Multi-source aggregation provides redundancy.
Liquidity: Large positions need market depth. Position limits and staged execution manage impact.
Last updated