Funding Rate Arbitrage

This strategy exploits basis and pricing differences between USDC-settled and coin-settled interest rate pools, while optionally hedging residual exposure using perpetual funding markets.

Core Idea

XCCY supports IRS and Fixed Yield pools with different settlement currencies:

• USDC-settled pools

• Coin-settled pools (ETH, BTC, etc.)

Even when referencing the same underlying yield, these pools can trade at different effective rates due to:

• collateral preferences

• funding availability

• leverage demand

• margin constraints

• external funding regimes

The strategy captures this spread.

Basic Arbitrage Structure

1. Identify a rate discrepancy

   • Same tenor and underlying yield

   • Different settlement currency

2. Take opposite positions

   • Receive fixed in one pool

   • Pay fixed in the other

   • Long or Short perpetual future to offset dollar risk of the underlying

3. Net DV01

   • Exposure is minimized

   • PnL comes from convergence of the basis

Example

• Coin-settled ETH IRS trades at 5.8%

• USDC-settled ETH IRS trades at 6.4%

Trade:

• Receive fixed at 6.4% (USDC-set)

• Pay fixed at 5.8% (coin-set)

• Long ETH-USD Perpetual contract with positive 0.5% Funding APR

Outcome:

• Net DV01 ≈ 0

• Earn the spread if basis narrows or persists through maturity

• Net P&L ~0.1% APR

Market Making Variant

Instead of one-off trades, advanced users can:

• provide liquidity in both pools

• skew quotes to balance inventory

• collect LP fees on both sides

Portfolio margin allows:

• shared collateral

• efficient netting across settlement types

Funding Rate Hedge (Optional)

Coin-settled positions may carry implicit exposure to:

• ETH or BTC funding regimes

This can be hedged via:

• perp markets on ETH/BTC

• taking opposite funding exposure

• sizing hedge to residual DV01 or delta

This converts the strategy into a pure rate basis trade.

Why This Exists

Settlement currency matters in crypto:

• USDC pools attract stable-denominated balance sheets

• Coin pools attract leveraged and directional users

• These flows are structurally different

XCCY exposes this difference transparently.

Risk Considerations

• Basis can widen before converging

• Funding hedges are imperfect

• Stress regimes may break correlations

Risk is mostly mark-to-market, not terminal, if sized correctly.

When This Strategy Fits

• professional traders

• cross-venue arbitrage desks

• sophisticated DAOs managing multi-asset treasuries

Summary

USDC vs Coin-Settlement Arbitrage monetizes:

• settlement preference

• funding asymmetry

• structural flow imbalance

It is a pure crypto-native fixed-income strategy made possible by multi-currency rate markets.