Funding Rate Design for Cryptocurrency Perpetual Futures

Summary

This study examines how funding rates can keep cryptocurrency perpetual futures aligned with a target value. It develops replicating portfolios that issuers can use to hedge their exposure and also considers path-dependent funding rates as a practical alternative to the original rate structure.

The analysis uses arbitrage pricing theory and path-dependent infinite-horizon backward stochastic differential equations. The authors establish existence and uniqueness for the equation solutions and analyze their behavior over long horizons, using those results to derive funding-rate designs and their relationship to perpetual prices. The supplied summary states that suitable rates can maintain alignment, but does not provide market data, implementation details, or numerical performance comparisons. Its conclusions therefore describe a pricing framework; real-world effectiveness would depend on assumptions and market conditions not specified here.

Key ideas

• Funding-rate design is presented as a way to keep perpetual futures near a target value.
• Replicating portfolios provide a proposed method for issuers to hedge perpetual-futures positions.
• Path-dependent funding rates are analyzed as an alternative to the original funding-rate form.
• The framework combines arbitrage pricing theory with infinite-horizon backward stochastic equations.
• The stated results are theoretical and the supplied description does not report empirical validation.

Tags

# Designing funding rates for perpetual futures in cryptocurrency markets


# Designing funding rates for perpetual futures in cryptocurrency markets









In cryptocurrency markets, a key challenge for perpetual future issuers is maintaining alignment between the perpetual future price and target value. This study addresses this challenge by exploring the relationship between funding rates and perpetual future prices. Our results demonstrate that by appropriately designing funding rates, the perpetual future price can remain aligned with the target value. We develop replicating portfolios for perpetual futures, offering issuers an effective method to hedge their positions. Additionally, we provide path-dependent funding rates as a practical alternative and investigate the difference between the original and path-dependent funding rates. To achieve these results, our study employs path-dependent infinite-horizon BSDEs in conjunction with arbitrage pricing theory. Our main results are obtained by establishing the existence and uniqueness of solutions to these BSDEs and analyzing the large-time behavior of these solutions.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.