Dynamic Collateral Control for Permissionless Spot Perpetual Basis Trading

TL;DR

This paper models permissionless spot-perpetual basis trading as a collateral control problem, deriving static and dynamic strategies, and validating them through live and historical data analysis.

Contribution

It introduces a novel collateral control framework for decentralized basis trading, including static and dynamic solutions, with empirical validation using live execution and historical backtests.

Findings

Collateral requirements increase with volatility, especially for long tail assets.

Dynamic intervention boundaries depend on solvency and rebalancing costs.

Execution analysis reveals significant realized wedges, influenced by market conditions.

Abstract

We study permissionless spot--perpetual basis trading in decentralized finance as a collateral control problem. The strategy holds spot inventory, hedges directional exposure with a short perpetual, and allocates capital between spot inventory and derivative margin under on-chain liquidity and execution frictions. The paper delivers three results. First, it solves a static control problem for the collateral share and shows that the risk-constrained formulation provides a more robust operating benchmark relative to the economic optimum. In comparative calibration, the required collateral rises monotonically under volatility stress. The collateral is the lowest for BTC and increases significantly for long tail assets such as LINK and DOGE. Second, the paper derives an asymmetric dynamic extension in which the lower boundary of intervention is solvency driven, and the upper boundary is determined by a trade-off between carry-loss and the cost of rebalancing. Monte Carlo simulation shows that the lower boundary remains structurally relevant, whereas meaningful interior upper triggers survive mainly in the regimes with high carry and low costs. Third, the paper validates an execution-aware implementation with live routed execution and historical backtests. The execution layer shows that the realized wedges are significant, but become worse in the case of selling the basis. This justifies a minimum effective rebalancing size and a positive execution buffer. The historical validation shows that in the case of a fixed control rule the realized performance is predominantly explained by the funding environment.