Centralized finance (CeFi) is one of the pillars of the BounceBit ecosystem, more specifically, centralized custody solutions like Ceffu, Mainnet Digital and Fireblocks support the framework. The custody solutions are the enabler of the underlying yield generation mechanisms. To make BounceBit a “positive-sum game”, a delta-neutral, low risk trading strategy is needed to provide a stable and reliable source of yield.
Cryptocurrency trading is filled with strategies to maximize returns, among which Funding Rate Arbitrage stands out for its profit potential. This article will explain the details of Funding Rate Arbitrage and explore how the BounceBit ecosystem is supported by it and can streamline your entry into this strategy.
What is Funding Rate Arbitrage?
Funding rate arbitrage is a trading strategy that exploits differences in funding rates between various markets. The key to this strategy lies in maintaining a delta-neutral position, meaning your overall exposure to price movements is balanced.
In simpler terms, you aim to offset any gains or losses from price fluctuations with profits earned from funding rates. There is more than one type of Funding Rate Arbitrage but we will focus on the following, since this is the main strategy of BounceBit.
Spot — Perpetual Arbitrage
This strategy involves executing two opposing trades simultaneously, with equal quantities, in both spot and perpetual contracts. Its goal is to capture the funding fee income from perpetual contract trading.
- Positive Arbitrage: When the funding rate is positive, buying spot and shorting an equivalent position in perpetual contracts generates stable funding fee income.
- Negative Arbitrage: When the funding rate is negative, selling borrowed coins on spot with leverage and going long in perpetual contracts with an equivalent leveraged position earns stable funding fee income.
For example: BTC is priced at $20,000 USDT and the funding rate is 0.03%. Let’s explore funding rate arbitrage using $4,000 USDT with 1x leverage:
- Buy $2,000 USDT worth of BTC spot and short $2,000 USDT worth of a BTC perpetual contract.
- Assuming consistent funding rates, every 8 hours, you would receive $2,000 USDT * 0.03% = $0.60 USDT.
- Collecting $0.60 USDT every 8 hours translates to $1.80 USDT per day. With an annualized return calculation, this translates to 1.80 * 365 / 2,000 = 32.95%.
Benefits of Funding Rate Arbitrage
There are several reasons why funding rate arbitrage is attracting attention, especially within the digital asset space:
- Reduced Risk Portfolio: Unlike high-risk strategies like leveraged futures, funding rate arbitrage focuses on exploiting price discrepancies between platforms for the same asset, not predicting market direction. This reduces reliance on price forecasts, leading to a lower overall risk portfolio.
- Market Inefficiency Opportunities: The strategy capitalizes on temporary misalignments in funding rates. By exploiting these short-term inefficiencies, arbitrageurs can capture additional returns not available through traditional trading.
- Market Neutrality: Funding rate arbitrage is market-neutral, meaning it works in bullish, bearish, or sideways markets. The focus lies on the differential between funding rates, not the overall price trajectory. This flexibility allows for participation regardless of the broader market trend.
BounceBit — Your Simplified Gate to Funding Rate Arbitrage
While funding rate arbitrage offers reliable returns, it requires in-depth research and risk management. BounceBit simplifies benefiting from this strategy. Core of the mechanism is the MirrorX solution by Ceffu. MirrorX is an off-exchange settlement solution that mirrors your assets on the Binance Exchange, without the actual funds ever being on the CEX. The benefits are reduced counterparty-risk, while still having access to deep liquidity on multiple asset markets.
BounceBit works with multiple experienced asset managers with a longstanding positive return track record to trade through MirrorX. All of the asset managers use Funding Rate Arbitrage as their trading strategy. Since the beginning of Premium Yield Generation on February 5th, the platform has accumulated a total of 52.71 BTC and more than $500K USDT as profit, which comes out to an average APR of 14.96% for BTC and 47,19% for USDT.
By integrating CeFi with DeFi, BounceBit enables BTC holders to earn yields across various blockchains. We currently accept WBTC on Ethereum and BTCB on BNBChain and plan on supporting different types of Bitcoin on various blockchains, including the native Bitcoin Network. BounceBit ensures safety through regulated custody by Mainnet Digital and Ceffu and offers transparency with Ceffu’s MirrorX for on-chain asset tracking. This approach not only addresses compliance concerns but also is important to uphold the trust in the platform. Every move of assets has to be approved by all parties involved.
So far, the launch of these strategies on BounceBit has been well-received, with over 2665 BTC and $35M USDT currently being used to generate yields, demonstrating the platform’s effectiveness and popularity.
If you want to take part in Funding Rate Arbitrage you can follow this guide in our documentation: https://docs.bouncebit.io/user-guides/how-to-subscribe-to-premium-yield-generation
About BounceBit
BounceBit is building a BTC restaking infrastructure that provides a foundational layer for different restaking products, secured by the regulated custody of Mainnet Digital and Ceffu. The BounceBit chain, designed as a showcase of a restaking product within the BounceBit ecosystem, is a PoS Layer 1 secured by validators staking both BTC and BounceBit’s native token — A dual-token system leveraging native Bitcoin’s security with full EVM compatibility. Critical ecosystem infrastructure like bridges and oracles are secured by restaked BTC. Through an innovative CeFi + DeFi framework, BounceBit empowers BTC holders to earn yield across multiple networks.
