Arbitraging on Futureswap for fun and profit

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Futureswap

5 min readFeb 7, 2021

Arbitraging is an economic service traders can perform that keeps markets efficient and can be highly profitable at the same time. To arbitrage, a trader simply needs assets to trade with and access to multiple exchanges. From there the task is to keep an eye (or a bot) on prices and when there’s a discrepancy from the average, begin arbing!

In this article, we’ll focus on finding Arb opportunities on Futureswap, but these concepts can work on any exchange. Futureswap is a perpetual futures platform built on Ethereum that offers leverage, live pricing, high capital efficiency, and incentivized trading.

Arbitraging 101

The idea behind arbitrage trading is to buy and sell an asset in different markets simultaneously. In an ideal and perfectly competitive market, the price of identical assets will be the same anywhere. However, in reality, different exchanges quote different prices for the same asset. By taking supply from one market and bringing it to another, the arbitrageur is stabilizing supply and pricing, while also earning a profit.

There are two common types of arbitrage:

Spread arbitrage — Spread, in this context, is the difference between the average (index) price of an asset across exchanges and the price in a given exchange (mark price). In order to perform a spread arbitrage, simultaneously buy where an asset is high and sell where it’s low.

Funding rate arbitrage — The funding rate is unique to perpetuals and is the fee that shorts earn from the longs or longs earn from the shorts, depending on which side has more demand. In general, the funding rate is measured on an 8 hour period. By holding an open trade on the less popular side, you’re earning the funding rate. To de-risk yourself from price exposure, you would perform the opposite trade on another exchange.

Arbitraging on Futureswap

Futureswap uses an AMM, which eliminates the need for order books and market makers, and ultimately allows for highly efficient entry prices for trades. To operate effectively, long/short open interest should be relatively balanced and in order to maintain this balance, Futureswap incentivizes traders and arbitrageurs to open or close a trade in a way that balances long/short pool usage.

Some terms to familiarize yourself with include:

Index Price: The true price of the asset

Mark Price: The current price a trade can be entered into on Futureswap, affected by trades

Funding Rate: Measured on an 8 hour period and paid continuously on the full leveraged trade size. If positive, longs pay shorts. If negative shorts pay longs.

Pool usage: A visual of long/short open interest, which impacts the funding rate and Mark price

Entry Price / Close Price: The resulting asset price from your trade. The larger your position size, the more this will differ from the Mark price.

Spread Arbitrage on Futureswap

Spread arbitrage is one of the easiest and most profitable trading techniques out there. The two values you’ll want to focus on to perform a spread arbitrage are mark price and index price. When the Mark Price deviates from the index price, there’s an opportunity to enter or exit a trade at a discount or perform an arbitrage:

If Mark Price is greater than Index Price, you would go short on Futureswap and open an equal sized long somewhere else.
If Mark Price is less than the Index Price, you would go long on Futureswap and open an equal sized short somewhere else.

Spread arbitrage example:

In this example, we see that the Mark Price is $25 lower than the index price. This is a significant difference of 2.5%, which can occur when a series of longs have closed or shorts have opened.

Since Mark Price is less than the Index price, we will be going long on Futureswap and short on another exchange, like Binance. By doing so, we managed to make up to a 25% profit if you’re using 10x leverage. Though, after fees on both platforms this would be some amount less, so also be prepared to adjust your arbitrage size accordingly.

Funding Rate Arbitrage on Futureswap

If you’ve traded in perpetual markets, then the funding rate should be very familiar to you. The funding rate determines the periodic payments paid by one side of the perpetual contracts to others (longs pay shorts, or shorts pay longs). It is determined by how heavily affected the asset price is on the exchange compared to its index price (averaged price).

This funding on most exchanges occurs over an 8 hour period. If you hold a position during this timeframe, you will either receive or pay a certain amount of funds. Two things that you should keep in mind here:

If the funding rate is positive, the longs will pay the shorts.
If the funding rate is negative, the shorts pay the long.

Funding Rate Arbitrage Example

In this example, the funding rate is 0.0498%. — meaning every 8 hrs you’ll earn 0.0498%. if you’re holding a short position. Annualized you’d be earning is a 72% APY. The funding rate is paid or earned by your open position size, so if you are using 10x leverage, you’ll effectively be earning 720% APY on your collateral.

On Futursewap, the funding rate changes continuously based on the imbalance of long/short open interest. On other exchanges, the funding rate may be fixed for 8hrs at a time. Funding rate arbitrage requires active trading in order to always be on the most popular side.

In order to arb funding rates, similar to spread arbitrage, you’ll want capital on multiple exchanges. From there you can watch the funding rates and perform the appropriate trades to capitalize on earning the funding rate. In order to do this with minimal risk, always be sure to do the opposite trade on another exchange, preferably if the funding rate there is also on the opposite side

Conclusion

The arbitrage techniques described here are just some of the many profit-making methods that you can use. At the most basic level a trader can use these techniques to enter and exit a position at an ideal time and on an advanced level, an arbitrageur will identify a potentially large profitable strategy and program a bot to perform it 24/7. In an upcoming article, we’ll break down how to create a bot.