Commonly referred to as perpetuals, perpetual swaps, or perps, a perpetual contract works just like a futures contract but doesn’t have an expiry date. Hence, you can hold a position for as long as you wish.
This necessitates exchanges to use a price anchoring mechanism called a funding rate to keep a perp’s price closer to the underlying crypto’s spot rate. Longs pay the funding rate to shorts or vice versa depending on the market conditions.
This article will tell you all about SOL funding rates, how and where to make money through them, and the relevant risks.
SOL Perpetuals And Futures Explained
In a futures contract, two traders agree to buy and sell an asset at a set price before or on a future date. For crypto futures, this pre-set price is the spot price of the crypto at the time of opening the contract.
Another important characteristic of a futures contract is that it’s a type of derivative. A derivative contract derives its value from the asset contained in it. In essence, the two traders entering into a futures contract don’t exchange any cryptocurrency. They merely settle the difference between the opening and closing price of the contract.
How Do Perpetual Contracts Work?
A perpetual contract works just like a futures contract, without an expiry date. As a result, you can keep it open indefinitely if needed. This is one of the biggest reasons why perpetuals are more popular than traditional futures. In particular, SOL perpetuals have significant trading volume as Solana is one of the biggest Ethereum competitors.
As mentioned above, SOL perpetuals don’t have an expiry date. The SOL perpetual traders simply exchange the opening and closing price of the contract at the time of settlement.
The perpetual’s price is kept close to the spot price through a mechanism called a funding rate. Since the two prices are similar, you can trade a SOL perp just like SOL spot, but with the flexibility of going long or short and using leverage.
The funding rate is used for calculating funding fees payable by longs or shorts to their counterparties. It is positive or negative depending on whether the SOL perp’s price is higher or lower than SOL’s spot price.
SOL funding fee = Nominal value of position x Funding rate
Funding rate serves as an incentive for shorts or longs to enter the market during bullish or bearish conditions, respectively. Assume SOL perp is trading higher than the spot rate in a bull market. More shorts will enter the market to earn funding fees and thus pull the perp price down and closer to spot. The opposite happens in a bear market.
The funding fee is calculated and paid on an hourly, 4-hourly or 8-hourly basis on most exchanges.
Positive And Negative SOL Funding Rates
A Positive SOL Funding Rate Means
- SOL perpetuals are trading at a price higher than the SOL spot rate.
- SOL perp traders who are long have to pay the funding rate to traders who are short.
- You can hedge your long positions in the SOL spot market by shorting SOL in perpetuals and earn funding fees, too, in the process.
A Negative SOL Funding Rate Means
- SOL perpetuals are trading at a price lower than the SOL spot rate.
- SOL perp traders who are short have to pay the funding rate to traders who are long.
How Do People Make Money Off SOL Funding Rates?
Arbitrage is a strategy that helps you take advantage of and profit from the discrepancies in SOL funding rates on different exchanges.
Assume the SOL funding rate is 0.03% and -0.02% on Exchange A and Exchange B respectively, calculated and paid every 4 hours. So, on Exchange A, longs will pay shorts, and on Exchange B, shorts will pay longs a funding fee every hour.
Let’s also assume that you have $20,000 capital and the funding rates remain unchanged for the next 24 hours.
Let’s also assume that you have $20,000 capital, and the funding rates remain unchanged for the next 24 hours.
Since Exchange A has a positive funding rate, you open a short SOL perp position on it with $10,000 margin. Your daily earning potential without leverage will be:
($10,000 x 0.008%) x 24 = $19.2
You can earn $96 or $192 by using 5x or 10x leverage, respectively.
Opening a long SOL perp position on Exchange B with $10,000 margin and zero leverage will earn you a daily profit of:
($10,000 x 0.004%) x 24 = $9.6
With 5x or 10x leverage, you’ll earn $48 or $96 per day, respectively.
Your total daily revenue:
Without leverage = $19.2 + $9.6 = $28.8
With 5x leverage = $144
With 10x leverage = $288
Please note this isn’t a ‘set it, forget it’ strategy. You’ll need to constantly monitor the changing SOL price and funding rates on both exchanges.
Cash And Carry
This strategy is about using discrepancies in SOL’s perp and spot price to your advantage. You buy SOL in the spot market and go short in the perpetuals market.
Let’s say you have $3,330 to invest, and SOL is trading at $30 in spot but $33 in perpetuals. You buy 100 SOL spot for $3,000 and short 100 SOL perpetuals with $330 margin and 10x leverage. If the funding rate is paid hourly and stays unchanged at 0.008% for the next 24 hours, your daily earnings (excluding exchange and leverage fees) would be:
($3300 x 0.008%) x 24 = $6.33
It’s called ‘cash-and-carry’ because you can carry the asset in the spot market until you’re ready to settle. Apart from earning funding fees, you also stand to gain from converging SOL prices in perp and spot markets.
Please note since you can’t utilize leverage in the spot market, your profit potential will be limited by the amount of cash you can put upfront in spot. This is quite disadvantageous compared to funding fee arbitrage explained above, where you can avail leverage for both trades.
SOL funding rates are generally found to provide a fair idea about prevailing market sentiment around SOL. If the SOL funding rate is positive and high, it indicates a bullish market.
In this case, you’d see most SOL perp traders taking long positions and paying funding fees to shorts. It’s the other way around for a highly negative SOL funding rate.
A highly positive or negative funding rate also indicates a higher deviation of perp price from spot price due to highly optimistic (bullish) or pessimistic (bearish) market sentiment.
Where To Trade SOL Perpetual Contracts
|Exchange||Accepts US Customers?||Trading Pairs Offered For SOL||How Often Funding Rates Are Set||How Often Funding Rates Are Paid Out||Perpetuals Leverage Range|
|Bybit||No||SOL-USDT, SOL-USDC, SOL-USD||8-hour intervals||8-hour intervals||Up to 50xUp to 50xUp to 50x|
|dYdX||No||SOL-USD||8-hour intervals||1-hour intervals||Up to 10x|
SOL perpetual trading pairs inform you about the assets you can deposit as margin to open a long/short position in the SOL perpetuals market. For instance, a SOL-USDC perp suggests that you can deposit USD Coin (USDC) as margin. The available SOL perpetual trading pairs vary from exchange to exchange.
Your choice of platform for trading SOL perpetuals will depend on multiple factors like transaction fees, trading strategy, country, and personal preferences.
For example, if you reside in the UK or US, you may not be able to trade SOL perpetuals owing to regulatory restrictions. Then if you’re buying/selling SOL perps for funding fees, the funding rate may be different on different exchanges.
It’s 0.00006% on dYdX, as against 0.01% on Binance, for the SOL-USD trading pair, at press time. The leverage varies too. For instance, you can avail up to 20x leverage on Binance and only up to 10x, for SOL-USD pair.
SOL Perpetual Trading Exchanges
Bybit SOL Leverage And Margins
Another well-known centralized exchange, Bybit, allows up to 50x leverage on SOL-USDT, SOL-USDC and SOL-USD perpetual trading pairs. The initial and maintenance margin base values are 2% and 1% for all three trading pairs but increase differently for each one of them in a tiered format.
Below is a table that shows these values for the SOL-USDT perpetual trading pair. The values for other pairs can be found at: SOL-USDC, SOL-USD.
|Position Value In USDT||Max Leverage||Maintenance Margin Rate||Initial Margin Rate|
Leverage, Initial Margin and Maintenance Margin Table for SOL-USDT Perpetual. Source: Bybit
Bybit exchange’s trading fee structure is tier-based, too, with fees ranging from 0.06% to 0% based on your user level. The traders pay/receive funding fees every 8 hours. It is calculated as follows:
Funding Fee = Position Value x Funding Rate
Position Value = Quantity of Contract / Mark Price
Funding Rate (F) = Premium Index (P) + Clamp (Interest Rate (I) – Premium Index (P), 0.05%, -0.05%)
dYdX SOL Leverage And Margins
dYdX is a reputed decentralized cryptocurrency exchange (DEX) that offers up to 10x leverage for SOL-USD perpetual trades. You’ll need to deposit an initial and maintenance margin starting at 10% and 5%, respectively, for your trades.
The initial margin remains 10% until it reaches baseline position size, which is 15,000 for SOL. Once it crosses that mark, the required initial margin increases linearly by 0.02 per 3000 SOL.
|Underlying Asset||Baseline Position||Incremental Position||Max Position Size||Incremental Initial Margin Fraction|
You’ll not be charged any trading fee if your trading volume for the last 30 days is under the $100,000 mark. For volumes higher than that, you’ll need to pay a fee ranging from 0.05% to 0% in a tiered format. dYdX offers trading fee discounts of up to 50% to people who hold the platform’s native Ethereum-based NFTs called Hedgies.
The funding rate is re-calculated in 8-hour intervals, but the funding fees are paid out in USDC every hour. They are calculated as follows:
Funding Fee = Size of the Position (S) x Index price for the market supplied by Oracle (P) x Funding Rate (R)
Funding Rate = (Premium Component / 8) + Interest Rate Component
Final Thoughts On SOL Funding Rates
SOL funding rates can be a little difficult to comprehend, especially for beginning perpetual traders. We’ve tried to make the concept easy to understand for everyone. In simple terms, SOL funding rates are a price anchoring mechanism to keep the SOL perpetual contract rates close to SOL spot prices.
This is necessary to enable speculative trading on SOL prices without the need to own and exchange the cryptocurrency. We also delved into ways you can profit from SOL funding rates and the platforms you can use towards that end.
Frequently Asked Questions
SOL funding rates are calculated differently by different exchanges. That said, there are two important factors – interest rate and premium – that are used in their calculation. Interest rate is a constant figure, and premium is the quantification of SOL perp’s price deviation from the SOL spot price.
SOL funding rates are paid by longs or shorts to their counterparties in the SOL perpetual market.
SOL perpetual futures work by serving as a medium to speculate on SOL price movements without the need of owning the cryptocurrency. This is made possible by funding rates that keep SOL perp price closer to SOL spot price, Buyers and sellers bet against each other using SOL perps, and exchange only the price difference at the time of settlement.
SOL is a cryptocurrency, and crypto assets are generally categorized as a risky asset class. Any adverse movement in SOL price can liquidate your position, causing huge losses. This is all the more probable if you use leverage.
Your earnings from SOL funding rates may be subject to taxes in your state or country of residence. You must refer to crypto taxation laws in your jurisdiction to get a better idea about such SOL funding rate taxes.