More Jesterly The Giver@lazyvillager1
Funding rates and why they are not what they seem
Funding is often used as a heuristic to evaluate leverage that is being layered on. The punch-line being that when funding gets high, this is a symptom of an an over-heated market and possibly, the lack of stability & an increased threshold for downside reflexivity
Today, funding on an annualized basis appears to be 9-12% APR. Green and unlike the 60%+ APRs we saw exhibited back in March. Similarly, alts have very low leverage as well, seemingly providing confluence that across the spectrum of crypto assets, leverage is low & the potential for higher before lower is apt
I believe that real funding on BTC and ETH today are closer to being 60%-70%.
This funding discrepancy exists because of:
a) the natural inclination for positive yield / contango where levered longs pay levered shorts, and
b) the introduction of Ethana and presence of delta-neutral trades
According to Ethana, when they mint $1 of USDe, they take in your spot collateral and open up a commensurate 1x perp short for your asset of choice. As of June, they have roughly a ~$3-3.5B book. That book is roughly ~$1.4B in BTC and ~$1.1B in ETH.
Therefore, there is roughly that same quantum in 1x perp shorts that are open, and have been open, during the time that this collateral exists.
We can use rough algebra to derive what funding would be w/o the existence of Ethana:
Let L = notional longs and S = notional shorts
The first set of equations is L/S = 1.12
The second set of equations is that L+S=10 ($10bn notional OI as evidenced by Coinglass, et al)
Therefore L=1.12(10-L) and we arrive at L=5.3B and S=4.7B
If 1.3B of the 4.7B is Ethana perp shorts, then that is ~30% of the notional shorts outstanding in the pool. And without Ethana, the skew would resemble closer to being 5.3B/(4.7B-1.4B) = 1.59, or ~59% APR
Given that there is evidence of contango / positive yield for short perps over time (per Ethana white paper, historically 18% in 2021, (0.6%) in 2022, 7% in 2023 and 18% in 2024) this would make shorts the denominator, creating a multiplicative effect on what real APR is in the case of delta-neutral trades as well
When we replicate this math across for ETH, the math comes out to ~73% APR
I believe this creates a framework where funding is highly misrepresented (5-7x greater than what it acutally is), and explains the sudden downside relativity experienced in the German sell-of (alts & due to emissions have been down-only over time w/ low leverage expression and even net short in many cases, and commensurately did not fall much)
