Carry Strategies

Basis trade (carry) and yield from on-chain protocols and AMMs.

Funding rate strategies

Economic intuition

Perpetual funding rates compensate longs/shorts for holding positions. When funding is strongly positive (longs pay shorts), shorts earn yield. When negative, longs earn yield.

Why does funding exist

• Perpetual contracts have no expiry (unlike futures)

• To keep perpetual price anchored to spot, exchanges implement funding mechanism

• When perp > spot: longs pay shorts (positive funding)

• When perp < spot: shorts pay longs (negative funding)

• Payment happens every 8 hours on most exchanges

Funding rate signal

$${Carry}(t) = \frac{\text{AnnualizedFunding}_t \cdot P_t}{\sigma_t \cdot \sqrt{365}}$$

Where:

• $\text{AnnualizedFunding}_t = \text{8\_hr\_rate} \times 3 \times 365$

• $P_t$ is current price.

• $\sigma_t$ is realized volatility at time t

Historical Funding Analysis (ETH/USDT Binance perps during ~2022.01 - 2025.10):

Funding Range	Frequency	Avg. Duration	Next 1d Return	Next 3d Return	Next 5d Return	Next 10d Return	Next 30d Return
< -5%	0.5%	1.5	-0.61%	-0.18%	-1.52%	-0.60%	-14.63%
-5% to 0%	5.0%	1.3	+0.64%	+1.86%	+2.84%	+3.66%	+12.98%
0% to +5%	18.4%	2.1	+0.08%	+0.24%	+0.50%	+0.76%	+7.29%
+5% to +10%	28.0%	2.7	+0.06%	+0.49%	+0.95%	+2.76%	+6.31%
+10% to +15%	33.1%	5.0	+0.34%	+0.73%	+1.27%	+1.25%	+7.96%
+15% to +20%	3.9%	1.2	+0.07%	-0.09%	-1.36%	-1.74%	-4.25%
> +20% APR	11.0%	4.4	-0.01%	+0.22%	+0.40%	+2.77%	-2.13%

Some observations from the table above:

• Strong positive funding, signals about possible market overheat and future price reversal (mean reversion signal) - check out the last line of the table.

• Negative funding is very seldom, but if not extreme, leads to consecutive price outperformance for the next 30 days - possible trend continuation or retrace after a short squeeze.

Carry strategy risks

1. Funding rate reversals: Funding can flip quickly (hours to days)

2. Basis risk: Spot and perp may decouple temporarily

3. Liquidation risk: If using leverage, extreme moves can liquidate positions

4. Opportunity cost: Delta-neutral carry forgoes directional gains

Given the above risks, here are the rules we identify for our internal carry strategy handling:

• Max allocation: 30% of portfolio to delta-neutral carry

• Exit if funding drops below 8% APR (not worth the complexity)

• Stop-loss: If spot/perp basis exceeds 2%, unwind position

Staking yield signal

We use this signal to asses the attractiveness of different on-chain Liquid Staking and Restaking tokens which provide additional yield:

$${Carry}_{\text{stake}}(t) = \frac{(\text{StakingYield}\% - \text{FundingCost}\%) \cdot P_t}{\sigma_t \cdot \sqrt{365}}$$

For example, for wstETH (Lido's Liquid staking token on ETH) at 3.5% staking yield:

• If funding cost (borrow rate) is 1.5% then the net carry is 2% which means modest long bias

• If funding is negative it stacks with staking yield and favours longs!