📉Funding Rate Reversion Vault

The Funding Rate Reversion Vault offers an investment strategy designed to exploit inefficiencies in funding rates while maintaining a market-neutral risk profile. This approach is particularly well-suited to the current market environment, where funding rate imbalances present significant opportunities for arbitrage.

1. Background

The two key trends observed in the current market:

- Shift from Long to Short Positions

Market fluctuations have led to a substantial number of users transitioning from long to short positions. This shift involves closing long positions and opening short positions, contributing to a growing imbalance in market sentiment.

- Excessive Short Positions on the Drift Platform

The Drift platform has experienced an influx of delta-neutral JLP strategies, with over $200M in TVL across protocols such as NX Finance’s Delta Neutral Vault, Gauntlet’s hJLP, and Vectis’s JLP Navigator. These strategies have collectively established massive short positions to hedge volatile assets (SOL, BTC, ETH), which has resulted in an oversupply of short positions. This imbalance has caused prolonged negative funding rates. Over the past month, for example, the average funding rate for the SOL/USDC trading pair on Drift has been approximately -20%.

These conditions create an environment where short sellers are required to pay funding fees to long position holders, making it possible to earn returns by strategically positioning against market consensus.

In response to these dynamics, this Vault employs a delta-neutral reverse funding rate arbitrage strategy. By hedging risk and taking positions counter to market sentiment (and Ethena’s strategy), the Vault seeks to generate consistent returns while maintaining a neutral exposure to price movements.

2. Why despoit funds in Funding Rate Reversion Vault

• High Expected Annualized Returns

  This is an anti-fluctuation strategy that brings you 30% APR during the bear market

• Consistent Returns Regardless of Market Recession

  Negative funding rates paid by short sellers on SOL/USDC positions, as long as the market remains bearish, it can consistently generate returns

• Short Withdrawal Period for Flexibility

  Unlike many investment vehicles that impose withdrawal periods to stabilize assets, this Vault allows withdrawals at any time after the first 8 hours. This provides investors with the flexibility to access their funds without sacrificing liquidity

3. Expected Return Analysis

1

Step 1: Funding Rate Yield from SOL Borrowing:

Negative funding rates provide a yield of 20%, which is amplified by 1.5x leverage: 20% × 1.5 = 30%

2

Step 2: USDC Staking Yield:

Deposited USDC earns a staking yield of 6%, with an effective multiplier of 2.5x due to leveraged capital deployment: 6% × 2.5 = 15%

3

Step 3: SOL Borrowing Cost:

Borrowing SOL incurs an effective cost of 10%, amplified by 1.5x leverage: 10% × 1.5 = 15%

$$\text{Total Expected Return} = \text{Funding Rate Yield} (30\%) + \text{USDC Staking Yield}(15\%)- \text{Borrowing Cost}(15\%)=30\%$$

The breakdown of mechanism will be shown at 5. Mechanism of Funding Rate Reversion Vault

4. Mechanism of Funding Rate Reversion Vault

4 Steps to NX Funding Rate Reversion Vault

1

USDC Deposit

Investors deposit USDC into the Vault. The deposited USDC earns a staking yield of 6%, providing a baseline return on capital.

2

Leverage via Collateralized Borrowing

The Vault uses the deposited USDC as collateral to borrow SOL at 1.5x leverage. Borrowing SOL generates additional costs due to interest repay:

• SOL Borrowing Rate: 10%

3

Conversion of Borrowed SOL

The borrowed SOL is sold for USDC through a swap transaction, which incurs minimal slippage:

• Slippage Cost: 0.3%

The converted USDC is then staked back into the Vault, earning an additional 6% staking yield.

4

Risk Hedging via Derivatives Market

To maintain a delta-neutral position and eliminate directional exposure to SOL price movements, the Vault opens a long position in the derivatives market using a limit order. This allows the Vault to hedge its risk while benefiting from negative funding rates on short positions.

By combining these steps, the strategy generates returns from three primary sources:

• Negative funding rates paid by short sellers on SOL/USDC positions

• Staking yields earned on USDC deposits

• Borrowing incentives from negative borrowing rates on SOL </aside>

6. Fee Structure

The Vault operates with transparent terms:

• Performance Fee: 15% of profits generated by the strategy

• Minimum Deposit Requirement: $10 USDT equivalent

• Lock-up Period: 8 hours (funds can be withdrawn after 8 hours)

7. Disclaimer

Sustained Returns Through Funding Rate Arbitrage

This strategy is designed to generate stable profits continuously through funding rates, rather than generating excess income over a short period. However, frequent deposits and withdrawals may incur transaction fees and slippage losses, potentially leading to losses. It is recommended to maintain funds for a longer duration.

Performance Expectations

The target APR for this strategy ranges from 20% to 25%, based on backtesting of market data over the past two months. However, this does not guarantee that the APR will remain at this level indefinitely. Changes in market sentiment may impact the actual APR achieved by the strategy.