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Crypto funding rates represent the periodic payments exchanged between long and short positions in perpetual futures contracts, serving as a crucial mechanism for keeping the perpetual price tethered to the spot price.
Perpetual futures markets are dominated by funding rates, a mechanism that keeps contract prices tethered to spot prices. While many traders view funding as a nuisance or a minor income stream, sophisticated quantitative strategies treat it as a primary alpha source.
Perpetual futures markets have created a unique yield opportunity: funding rate arbitrage. By simultaneously holding a long position in the perpetual contract and a short position in the spot market (or vice versa), traders can capture the periodic funding payments without directional exposure.
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