New Meta: Automating Basis Trading
What is Basis Trading? Delta-neutral or directional? How is it possible to profit from basis trading without micro-management and constant monitoring? Wen testnet sir? Let’s get into it.
The popularity of cryptocurrency derivatives is growing, as is the number of decentralized exchanges that offer different tools to trade futures and options. And with the emergence and development of platforms like Perpetual Protocol, dYdX, MCDEX, Mango Markets, the landscape of derivatives platforms in the DeFi space has changed dramatically. This also leads to the emergence of various trading strategies that can be applied to maximize profits.
There are trading strategies that can be applied either along or against the market movement, meaning that the success of these techniques depends on where the price moves, and on whether its movement is in line with your expectations. At the same time, however, some strategies do not rely on the price movement, and allow profiting while also having relatively low exposure to risk.
In one of our previous articles, we talked about futures trading on decentralized platforms and the possibilities of funding with our DeCommas Futures platform. Its user-friendly interface allows you to track funding rates on different exchanges and use the difference in farming or arbitrage between decentralized exchanges and building basis strategies.
In this article, we’ll provide you with a brief recap of what Basis Trading strategies are, and then acquaint you with our further plans.
Derivatives — such as futures or options — are linked to underlying assets, and therefore track their price. The price of the contract and the underlying asset’s price at a particular point in time may differ, providing opportunities for speculation.
Basis trading strategies are defined as methods of making a profit from the difference between the price of the underlying asset on the spot market and the price of its contract. In order to bring the contract price closer to the spot price, a special mechanism called “funding rate” is implemented. According to this mechanism, holders of short or long positions pay commission to the counterparty, depending on the direction of price change.
The chart shows how long a Funding Rate can be skewed towards either longs or shorts. Positive Funding: those in a long position pay the commission to shorts. Negative Funding: those in a short position pay to longs. Data by https://www.coinglass.com/
Before the advent of perpetual futures in DeFi, millions of dollars a day paid in fundings — in addition to strategies built on top of that — remained the prerogative of centralized exchanges’ (CEX) users. Now the tides are changing.
Basis Delta-Neutral Strategies
Delta-neutral strategies are trading strategies which do not depend on market directions. Such a state is achieved by buying one instrument and selling another, as well as in cases of opening mutually reversed positions — long and short, which provide a neutral position in the market.
Such an approach to gaining profit has a number of advantages, compared to directional trading strategies:
- They are less risky and are virtually guaranteed (if properly executed) to produce profits, although in some cases profits may be relatively low;
- A neutral approach to trading reduces the risks of liquidations or deposit loss in the event of sharp price movements;
- Neutral portfolio strategies can also be used to diversify and manage risk over the long-term.
Similarly, using the DeCommas Futures dashboard, we can find a good basis trade opportunity and then open two counterbalancing positions in order to safeguard the value of the portfolio against price movements. In this case, we need to reach equilibrium by opening positions of equal value in both directions while earning returns through the accompanying opportunities — i.e., funding rate commissions.
An example of an opportunity to build a basis strategy on a BTC/USDC pair between dYdX and Perpetual Protocol v1.
Basis Directional Trading Strategies
In cases where a market participant is already exposed to an asset and the market tends to negative fundings, it is possible to build a basis strategy while at the same time maintaining the asset price exposure.
To do this, the market participant should sell the asset on the spot market and open a long position of equal size.
Example: a long position with GRT/USDC, with an average annual fund yield of about 34% (according to the weekly recalculation). Thus, the investor retains exposure to the price and collects an additional premium.
One-Click Strategies from DeCommas
The blockchain space is in a state of rapid expansion, while also providing users with more and more opportunities and solutions — many of which require certain skills and knowledge. The rapid development of the cryptocurrency world leads to both the improvement and complication of many processes and approaches, which is an important challenge that lies along the path toward the proliferation of decentralized solutions.
Looking at basis trading and delta-neutral strategies in general, they may seem complicated to an inexperienced user, which is a limitation for the wide application of these strategies. In order to realize the whole range of possibilities that are available in the world of decentralized finance, it is first necessary to automate and simplify these strategies, which is one of the main challenges we are addressing here at DeCommas.
Perpetual Protocol v2 (Optimism) funding rate over a one-month period, being mostly in the positive zone.
Building structured products into a single button with multiple financial instruments and automation is already becoming a hot topic in the eyes of the DeFi community, as it opens up new possibilities in managing one’s portfolio and risk profile.
With a ton of experience in creating automated solutions, 3Commas.io has set out to create a product that is capable of empowering users to take advantage of sophisticated, automated strategies in a single click. You will be able to make steady returns using our automated strategies based on different basis, arbitrage, and structural approaches to trading on the cryptocurrency markets.
First strategy lifecycle. Based on Perpetual Protocol v2 and Uniswap (Optimism).
Soon, you will be able to see the benefits of automated basis strategies, which will be available in “Test Mode”.
Due to the specifics of the products (on top of which we are building our first Automated Vault), perpetual futures on Perpetual Protocol v2 and Uniswap v3 on Optimism, and the specifics of the strategy itself, the launch will be limited in terms of capital capacity.
A basis trading strategy on perpetual futures in DeFi was used by our team in 2021. It was built on top of dYdX and Perpetual Protocol v1 to benefit from fundings with https://decommas.io/futures, and we would like to demonstrate our protocol model first using this strategy. But who knows what lies ahead…
Make sure to also fill out the waitlist form in advance!