Designing funding rates for perpetual futures in cryptocurrency markets

TL;DR

This paper proposes a novel approach to designing funding rates for perpetual futures in cryptocurrency markets, ensuring price alignment through advanced mathematical modeling and hedging strategies.

Contribution

It introduces a new framework using path-dependent BSDEs and arbitrage pricing theory to optimize funding rates and maintain perpetual future price stability.

Findings

Effective funding rate designs maintain price alignment.

Replicating portfolios enable better hedging.

Path-dependent funding rates offer practical advantages.

Abstract

In cryptocurrency markets, a key challenge for perpetual future issuers is maintaining alignment between the perpetual future price and target value. This study addresses this challenge by exploring the relationship between funding rates and perpetual future prices. Our results demonstrate that by appropriately designing funding rates, the perpetual future price can remain aligned with the target value. We develop replicating portfolios for perpetual futures, offering issuers an effective method to hedge their positions. Additionally, we provide path-dependent funding rates as a practical alternative and investigate the difference between the original and path-dependent funding rates. To achieve these results, our study employs path-dependent infinite-horizon BSDEs in conjunction with arbitrage pricing theory. Our main results are obtained by establishing the existence and uniqueness of solutions to these BSDEs and analyzing the large-time behavior of these solutions.