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Farm Funding Rate

Funding Rate Arbitrage: is a strategy that involves borrowing a stablecoin and using it to buy a token that is expected to appreciate in value. The goal is to profit from the difference between the interest rate on the borrowed stablecoin and the appreciation of the token.

Prediction​

  • FR farming tokenizes the most valuable real estate in CeFi and puts it on chain (OI); this will eventually kill CeFi or force it on chain
  • New protocols/inflows will compete for OI; the cost to compete is token incentives + sub-optimal yield for a period of time, you effectively reserve your spot for when funding rates next spike/camp while FR is negative
  • FR will be farmed until APY is mid teens ~= DeFi stablecoin rates
  • Biggest risk is en-masse exit causing OI unwind slippage or underlying exchange solvency issue
  • Push for more OI will lead people to riskier venues/collateral until we see a blowup of a smaller/riskier player, causing a shift to DeFi
  • Funding rate farming is likely the catalyst for Derivs to move from CEXs to DEXs (risk mitigation, cost, incentives)
  • Stablecoin issuers (DAI) will internalize most of the yield in the end and form symbiotic alliances with funding rate protocols
  • Current FR farming iteration is the likely riskiest iteration, but still not that risky

Vance Spencer

Questions​

Which DeFi concept covered here is most commonly misunderstood by developers building on top of it — and what's the misconception that causes the most bugs?

  • At what level of DeFi sophistication does the conceptual understanding become less important than the practical experience of loss from getting it wrong?
  • How does the concept change in practice when implemented on a high-throughput chain versus Ethereum mainnet?
  • Which adjacent DeFi concept is most important to understand in combination with this one to reason about system behavior correctly?