i. Funding Rate
Funding Rate Risk
Last updated
Funding Rate Risk
Last updated
When funding is more negative than stETH yields, it’s intended that the reserve fund would step in and fulfill settlement to minimize impact on USDca backing. If funding were to persist negative for consecutive months, the reserve fund would gradually be depleted. Once the reserve fund is depleted, a slow attrition of principal backing USDca would result and USDca would depeg.
However, if value accrual to staked USDca were negative for months on end, it would be particularly irrational for users to continue to stake and in this instance a wave of redemptions would be likely. Redemptions of USDca mean CAMP would close out corresponding short derivative positions, which would alleviate the downward influence on funding rates and negative rates would be more likely to revert back to neutral/positive. Said differently, USDca supply would be expected to find an equilibrium with the market.
The reserve fund is being capitalized by positive funding payments the protocols get on its short perpetual futures positions when the perpetual futures funding rates are positive. A portion of the capital coming from fundraising rounds can also be injected into the fund. You can check the as well as the section in our public docs.
Yes, there is only one address to the reserve fund as stated on our docs. To view its composition you check .
ETH and BTC funding rates have exhibited natural positive bias and contango, with an average of between 7%-9% over the last 3 years on an open interest or volume weighted basis, including the 2022 bear market.
Using staked ETH as collateral for USDca gives an additional margin of safety in the form of 3-5% yields to cover negative funding rates. That is to say, the assets backing USDca will only be negative yielding when the combined staked ETH yield and funding rate drops negative.
Looking at ETH open interest weighted perpetual futures funding rates, we observe 19.1% of days had a negative yield and 16.1% for BTC. Using, ETH yields to calculate an implied combined yield, we see that there has only been one quarter in the last 3 years where the average excess/combined yield was negative.
Funding rates have displayed mean-reverting characteristics, which is to say they may dip negative but those rates tend to not persist and don't drift lower over time. Positive baseline funding on some of the biggest derivative exchanges with over 50% of open interest (Binance & Bybit) help keep overall rates positive.
Reversion to a positive mean can be seen in the longest consecutive days of either positive or negative funding rates. Negative funding rates revert quicker thanks to the dynamics described above, with the longest streak of consecutive days negative funding lasting just 13 days for both assets.
The longest streak of positive funding days has been 207 days for ETH and 176 for BTC, set this year.
For a more detailed explanation on the distribution of funding rates as it relates to USDca backing, see this on the topic.
