What is Funding Rate Arbitrage
Funding Rate
A Funding Rate is a periodic payment between derivatives market participants. The mechanism keeps the futures price close to the spot price.
- If the rate is positive → longs pay shorts
- If the rate is negative → shorts pay longs
Rates are charged every 1, 4, or 8 hours depending on the exchange.
The Arbitrage Idea
Different exchanges have different funding rates for the same instrument at the same time.
Example:
| Exchange | Instrument | Funding Rate (APR) |
|---|---|---|
| Paradex | BTC-USD-PERP | +45% |
| Hyperliquid | BTC | +12% |
| APY | +33% |
By opening a short on Paradex and a long on Hyperliquid, you can currently earn ~33% APR. Market risk is present.
Risks
- Market risk — minimal (positions hedge each other), but not zero with different liquidity
- Liquidation risk — if price moves sharply, one position may be liquidated
- Rate change risk — rates change dynamically, the spread may narrow
Additional Costs
- Exchange fees — each trade incurs an opening and closing commission
- Slippage — the actual execution price may differ from expected
- Bid/ask spread — the difference between the buy and sell price reduces the final return