[Serenity Premium] Funding Rate Arbitrage on Hyperliquid and Pika [1st Review Dec 2023]
Funding rate arbitrage is one of the oldest strategies in DeFi and probably so in traditional finance as well. Back to the 90s, traders borrowed JPY with negative interest rates and converted to USD for higher interest rates.
Perps markets on DeFi has developed significantly over last year, with GMX and dYdX leading the sector and shipping new products. Other protocols like MUX are on the rise both in terms of TVL and listings. For the purpose of this article, we wil explain the basics of funding rate arbitrage using two slightly smaller perps protocols, Hyperliquid (Arbitrum) and Pika (Optimism).
About Perps
According to DefiLlama, there are 170 derivatives protocols and by TVL, 60 of them are over $1m. Most of the perps offer the trading of major or popular crypto tokens, in the range of 10 to 100 listings. All of the protocols function similarly: there's an on-chain counterparty mechanism, either a automatic pool or pooled liquidity managed by the protocol.
Prices are quoted from oracles like Chainlink or Pyth or CEX sources.
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