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.

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How It Works

Delta-Neutral Strategy

Position Structure:

1. Buy spot asset (e.g., ETH)

2. Short equal perpetual position on Drake

3. 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 direction

Funding 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

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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 shorts

Sideways Markets (Moderate Funding):

Rate: 0.01-0.05% per 8-hour period
Annual: 10-30% APR
Driven by: Balanced positioning

Bear Markets (Low/Negative Funding):

Vault exits positions or rotates to positive rates
Maintains capital preservation focus

Calculation 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)

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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

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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

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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% APR

Composability:

• Use as collateral in other protocols

• Provide liquidity in AMM pools

• Transfer freely between addresses

• Standard ERC-20 functionality

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Withdrawal Process

Standard two-step redemption:

1. Request: Submit redemption, shares frozen

2. Execute: After 24-hour delay, burn shares for USDC

Delay prevents rapid withdrawals during market stress.

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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.