Basis Trading on MCDEX

Funding Payment

MCDEX perpetual is a derivative pegged to the underlying index by funding payment. Such funding payment is executed every second according to the funding rate which helps to keep the price of perpetual swap close to the price of the underlying asset.

Strategy

As the funding rate is always positive, the trader can earn this funding by shorting the perpetual. To hedge the short exposure, the trader can long spot concurrently.

  1. Buy some amount of spot coin in the other markets
  2. Sell (short) the same amount of perpetual on the MCDEX
  1. Sell some spot + unwind the same amount of short perpetual on MCDEX
  2. Add more stable coin margin to the short position

Profit Analysis

The revenue of this strategy comes from the funding payment, while the cost comes from the trading fee on the spot and perpetual markets.

  • α is the percent of the principal swapped for the spot coins
  • γ is the average annualized funding rate during the strategy
  • φ is the sum of spot trading fee and perpetual trading fee

Inverse Perpetual

There are inverse perpetual contracts (USD-ETH and USD-BTC), which use spot coins (ETH, BTC) rather than the stable coin as collateral. The basis trading of the inverse contract is much easier:

  • Buy the spot coins with all the principal;
  • Use the spot coins as collateral to short the perpetual contract at 1x leverage;
  • No re-margin is needed;

More Profit: Trading Mining Reward

By trading and holding the short position on MCDEX, traders will have a mining score if he/she stakes some MCB on the platform. As such, the trader will earn an MCB trading mining reward.

DeFi Protocol

Is the strategy a little too complicated? Don’t worry. Some fantastic DeFi protocols have implemented the basis trading strategy. Via these protocols, traders can get the funding profit by just depositing money.

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