Binance finally discovered the malicious banker’s funding rate card after a full moon

Since the crypto market fell sharply in mid-August, the market trend of the currency circle has rarely fluctuated sharply in the past month and a half, and the price of BTC has always remained around US$26,000. However, there are still many tokens on Binance that have seen the largest increases, such as TRB, HIFI, UNFI, PERP, LPT, etc.

However, it is worth noting that Binance usually releases an announcement about a week after these currencies have risen sharply, adjusting the leverage, margin tiers and funding rate caps of U-margin perpetual contracts of such currencies. After the adjustment, these tokens all fell sharply.

The sharp rise and fall of the coin price is the norm in the crypto market, but in the recent bull-bear game of the coin price, the bears suffered heavy losses in the tug-of-war. A large part of the reason is that the bulls who pull the price use the funding rate mechanism to arbitrage. This profit-making method was finally seen through by the head CEX Binance after it was staged many times and lasted for more than a month. Recently, IMX issued a rate adjustment announcement only half a day after a sharp rise.

So what exactly is the funding rate? How do market makers use it to arbitrage? Can such arbitrage techniques continue to be replicated in the future?

Representative of contract funding rate arbitrage: TRB

Funding rates are the rates set by cryptocurrency exchanges to maintain a balance between the contract price and the price of the underlying asset, and are usually applicable to perpetual contracts.

It is a mechanism for exchanging funds between long and short traders, and exchanges usually do not charge this fee. It is mainly used to adjust the cost or benefit of traders holding contracts so that the contract price remains close to the price of the underlying asset.

When the price of a perpetual contract deviates from the price of the underlying asset, the exchange will adjust the funding rate to encourage long or short positions to pay funds in the opposite direction, thereby returning the contract price to the price of the underlying asset.

When the market is generally bullish, the funding rate is usually positive and increases over time. At this time, longs will pay the funding rate to shorts. Conversely, when the market is bearish, the funding rate is usually negative, and short traders pay the fees to longs.

Currently, the crypto market is in a deep bear phase, with bearish forces in the majority. Some investors are targeting this group and are luring short sellers to place short positions by significantly raising the prices of tokens with poor liquidity and low market capitalization, and then using the already negative contract funding rates for arbitrage.

Among the above-mentioned tokens, TRB is the most classic.

Since TRB reached its historical low of $6.67 in June 2022, it has only risen once two months later and has remained quiet ever since. Even when the price of BTC doubled at the beginning of this year, its trend has been extremely stable.

But starting from the end of August this year, TRB suddenly began to rise, and the increase nearly doubled and continued to rise sharply. Finally, after several increases, it reached a staged historical high of $48.90, with an increase of about 500% in just half a month.

As the market is in a deep bear phase, tokens that have skyrocketed several times usually become targets for short sellers. Therefore, a large number of short positions were set up on TRB's perpetual contract, but the price of TRB remained high before Binance released the adjustment announcement, and the scary thing is that the funding rate of TRB's perpetual contract has reached -3%.

According to the funding rate mechanism set by the trading platform, short traders need to pay fees to long traders at this time. Binance's settlement cycle is once every 8 hours, which means that short traders who ambush TRB have to transfer 3 fees to long traders every day.

If a short position is set with 10 times leverage, it will need to pay 30% funding rate fee to the long position every time, which is unbearable for any investor.

As can be seen from the above figure, TRB’s funding rates on many well-known exchanges are negative, and Binance and OKX are particularly leading in terms of frequency and peaks.

However, what is even more surprising is that this situation lasted from September 12 to September 16. TRB short sellers not only have to bear the short selling pressure brought by the rising coin price, but also bear huge funding rate pressure every day.

Faced with this kind of manipulation in the crypto market, some netizens lamented that this time the market makers are not just trying to reap the profits, but to uproot them.

Late but here we are, temporarily at IMX

In fact, the use of perpetual contracts for arbitrage has been around for a long time, but it is not commonly used. This is mainly due to the risks involved, such as a reversal of funding rate values, a sharp rise or fall in the market, a long-term bear market or a currency decline, etc.

The exchange has the obligation to maintain the balance of the crypto market and protect investors. Binance has frequently taken action against market makers who have repeatedly used funding rates to arbitrage during the bear market.

As can be seen from the above figure, Binance has significantly increased the frequency of issuing such announcements since August this year, but most of the announcements on adjusting funding rates were issued after the above-mentioned currencies such as HIFI, UNFI, PERP, LPT, etc. were generally released last week. The main changes were to adjust the leverage, margin ladder and funding rate cap of the U-margin perpetual contract of the corresponding currency.

Taking TRB as an example, Binance has adjusted the funding rate settlement frequency for TRB U-margin perpetual contracts from once every eight hours to once every four hours, and the funding rate cap multiplier has been raised from 0.75 to 1.

In addition, the Binance official team stated that in order to protect the rights and interests of users and reduce risks in extreme market conditions, Binance Contracts may take additional protective measures for the TRBUSDT U-margined perpetual contract without further announcement.

Potential protection measures include, but are not limited to, adjusting leverage and margin (including the maximum leverage ratio of each tier, position limit, and maintenance margin ratio), adjusting funding rates (including base rate, premium index, and fee cap), changing price index components, or adopting the "Latest Transaction Price Protection Mechanism" to update the mark price.

This means that Binance will have other corresponding measures to curb the occurrence of such bad behaviors in response to the market makers’ operations.

The amazing thing is that after each Binance funding rate adjustment announcement, all of the above-mentioned currencies that had risen sharply fell sharply without exception, and the funding rates also gradually moved from negative to positive to varying degrees. These two points are reflected in the above charts.

Perhaps it was because the market makers with ulterior motives used the funding rate arbitrage method too frequently, and the Binance team began to be vigilant. So on September 20, facing the sudden sharp rise of IMX, the announcement of the funding rate adjustment was issued in just half a day.

The effect is obvious. IMX did not continue to rise, and the decline was about 15%. In particular, its funding rate reached -2.5% at 16:00 on September 21 and then rebounded to around -0.72% on the same day. If IMX is allowed to rise again, the short sellers of IMX will likely suffer the same fate as the investors who shorted TRB.

However, countermeasures always have a lag, and investors' levels vary. It is difficult to say that such arbitrage techniques will not continue to be effective in the future.

Conclusion

There are various types of derivative instruments in the financial market. The method of using low-market-cap tokens such as TRB and siphoning investors' funds through the contract funding rate mechanism is not necessarily very clever, but it is extremely useful in the bear market stage when liquidity is extremely low and the money-making effect is scarce.

In essence, the short sellers who suffered huge losses entered the game and bet based on their expectation that the target currency would likely enter a falling range in the future. But this time, the hunter became the prey.