Funding Rate Dynamics in Decentralised Perps: Harvesting On-Chain Carry
- May 15
- 3 min read
Updated: May 16
In traditional markets, carry trades are a cornerstone of structured yield. In DeFi, funding rates in perpetual futures offer a similar opportunity, if approached correctly.
Funding rate arbitrage has often been framed as “free yield.” In practice, it isn’t. Most traders treat it as a directional trade or chase it without a structured approach. At AXM Capital, we don’t pursue funding rates as a shortcut to yield. We build strategies designed to capture the market neutrally, using vault-level execution logic, pacing controls, and embedded risk safeguards.
What Funding Rates Actually Represent
Funding rates exist to align the price of perpetual futures with their spot equivalents. When demand is higher for longs than shorts, longs pay shorts. When the reverse is true, shorts pay longs. The rates update frequently, based on open interest and volatility.
In decentralised venues like Hyperliquid, Drift, or dYdX, this mechanism operates on-chain and is visible, measurable, and harvestable. But unlike CEXs, on-chain funding dynamics vary more widely by protocol, volatility, and liquidity depth.
That creates opportunity, but only when structured appropriately.
Why Most Traders Misuse Funding Opportunities
Funding arbitrage is often misunderstood. Three common failure points:
Directional bias: Traders remain long or short with conviction, turning what should be a neutral position into a speculative one.
Overexposure: Chasing funding with leverage amplifies drawdown risk and execution slippage.
Manual management: Strategies that rely on human response often enter or exit late, missing favorable windows or exiting too slowly in volatility.
We don’t structure funding rate exposure as a “play.” We deploy governed carry strategies with embedded risk logic and delta neutrality from the outset.
How We Structure On-Chain Carry
Our carry strategies are built to extract funding premiums without betting on price direction. Each one is deployed through an isolated vault with real-time parameters controlling exposure, cadence, and performance triggers.
Vault Architecture:
Delta-neutral structure: Equal and opposite exposure via perp and spot/synthetic hedge
Funding entry logic: Vault opens only when funding exceeds a predefined threshold
Slippage and depth filters: Blocks entry if execution degrades expected net yield
Execution Parameters:
Position caps: Limit exposure per asset, per pool
Pacing logic: Reduces churn and costs during high-volatility windows
Circuit-breakers: Pause redeployment when volatility or funding rate variance spikes
This is not a bot. It’s a governed structure designed to preserve capital while selectively harvesting alpha.
Risk Management in Perp Funding Strategies
Risk in carry strategies doesn’t come from funding itself, it comes from poor structure. Here’s how we mitigate it:
Volatility Bands: Prevent new deployments during macro or local instability
Rate Validity Windows: Require funding rate persistence before entry
Protocol Whitelisting: Only operate on venues with deep liquidity and stable oracle systems
Idle Mode: If funding turns negative or execution deteriorates, vaults remain idle without incurring unnecessary costs
We’re not optimising for uptime. We’re optimising for risk-adjusted net performance.
When It Works, and When It Doesn’t
These strategies aren’t always active. And that’s intentional.
Favorable Regimes:
Retail long bias
Elevated open interest skew
Stable or positive funding over multiple epochs
Unfavourable Regimes:
Neutral or negative funding
High volatility with rate reversals
Sudden directional breakouts
Knowing when not to deploy is part of the structure. Capital efficiency comes from precision, not from being “always on.”
Why This Matters for Allocators
For allocators seeking uncorrelated yield that doesn’t rely on emissions or tokenomics, structured carry strategies can play a valuable role. Our perp funding strategies are:
Delta-neutral
Governed by vault-level risk logic
Fully on-chain and auditable
Non-custodial and flexible
They’re not trades. They’re structures, built to function under pre-defined tolerances, and to exit when those tolerances are breached.
If you’re comparing passive yield strategies versus alpha-seeking deployments with tight controls, this is the latter.
Further Information
We provide detailed strategy memos outlining signal triggers, funding rate models, and vault-level controls for allocators evaluating carry exposure across decentralized perp markets.