Funding Rate Farming
Recommended Reading Before Starting: Perpetuals, Funding Rates
Overview
One strategy we employ at Elemental is delta-neutral funding rate farming. In a bull market, perpetual ("perp") contracts often trade at a premium to their underlying assets because most traders anticipate rising prices. Under these conditions, long positions pay shorts a funding rate, creating an opportunity for those holding short positions to earn a steady stream of income. This income can become substantial in a strong bull market and often grows even larger when dealing with smaller-cap tokens.
Creating a Delta-Neutral Position
While short positions earn funding payments, they also carry directional risk if held alone. As a fund, we aim to avoid exposure to an asset’s price movement. To achieve this neutrality, we balance a short perp position with an equal spot holding. For example, if we open a 1,000 SOL short in the perp market, we simultaneously hold 1,000 SOL in our spot portfolio. This delta-neutral stance ensures that our overall portfolio value remains stable, regardless of whether SOL’s price rises or falls. Once established, this balanced position allows us to collect funding payments without worrying about price volatility.
Managing Funding Rate Volatility
Although this strategy can produce reliable income, funding rates themselves can fluctuate significantly. Below, you’ll find an example chart showing how the funding rates of a particular token varied over a month. To provide our depositors with fixed yields, we use our Compound Fund to absorb and mitigate this volatility. In addition, we diversify across multiple token types, ranging from large L1 tokens to smaller altcoins. Each category tends to behave differently, helping smooth out returns at the portfolio level.
Active Rotation to Maximize Profitability
We also closely monitor market conditions to avoid remaining in positions during periods of negative funding rates. Through active management, we rotate position sizes and redistribute capital to maintain profitability. By remaining agile, we preserve the advantages of this strategy and continually fine-tune our exposure to funding opportunities.
Proprietary Execution Scripts: The Elemental Advantage
At Elemental, our edge lies not only in the strategies we deploy but in how efficiently we execute them. Our proprietary trading scripts have been engineered to achieve exceptionally low execution costs - on average 0.05% per trade, compared to the 0.5%–1.0% typically incurred by other funds.
Below is an example of Elemental executing a delta-neutral position with approximately $400,000 in capital - purchasing spot SOL while simultaneously opening short SOL perpetuals. The entire operation was completed at an exceptionally low execution cost of just 0.0123% despite being executed under unfavorable market conditions.
This near-zero cost basis fundamentally enhances our operational agility. It allows us to enter and exit positions with exceptional speed and efficiency, free from the friction that often traps other funds in underperforming strategies. While conventional funds may hesitate (holding on in the hope that a lagging position will recover) we can reallocate capital instantly and with precision, avoiding unnecessary losses and continually pursuing higher-yielding opportunities.
We believe that over time, strategies will become commoditized. What will remain scarce, however, is execution mastery - the ability to execute more efficiently than the rest. This is where Elemental continues to lead. Our engineering team devotes significant resources to refining, testing, and iterating these proprietary systems to stay ahead of evolving market conditions.
Ultimately, our scripts form our moat, ensuring that even as the broader DeFi landscape grows more competitive, Elemental remains at the forefront of consistent, high-performance yield generation.
Last updated