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Saturday, July 2, 2022

Polygon Traders Looking For Leverage With Negative Funding Rates

According to recent data, most of the traders of Polygon and AAVE are being paid around 4.3% every week to ensure future contracts. The crypto markets see either the traders or the retail investors be bullish. This results in an interesting scenario as it incentivizes most of the arbitrage whales and desks to sell off their futures contracts while they are purchasing regular spot exchanges in the market.

Perpetual futures automatically rebalance the daily value of Polygon

Contrary to most of the regular contracts, most of the futures prices at a perpetual level are quite similar to those that are involved in regular spot exchanges of crypto assets like Polygon. This does ensure that the lives of the retail traders are much easier as they do not necessarily have to calculate the premium futures or simply roll over positions as they near expiry.

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The funding rate is the only thing that allows this to happen, and this keeps getting charged by the buyers of Polygon who keep expecting more and more leverage. But, when the situation gets inverted and sellers seem over-leveraged, the funding rate moves at a negative rate- with it turning out the fee. 

The typical situation in the crypto market, with assets like Polygon and AAVE usually involves the leverage longs churning out the fees, with it oscillating somewhere between 0% and 0.30% in a period of 8 hours- which finds equivalence at around 6.5% per week. On the 19th of May, most of the markets of cryptocurrency collapsed- which opened up the futures of Polygon and AAVE- with the latter dropping from $200 to $82 million with the longs closing in their positions or getting forcibly liquidated. 

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