Funding Rate Risk

Unipay’s delta-neutral strategy relies on perpetual futures markets to hedge price exposure and generate yield for USDu. While this approach is designed to maintain stability and provide attractive returns, it introduces risks associated with the funding rates on these markets.

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Understanding Funding Rate Risk

1. Volatility in Funding Rates Perpetual futures funding rates can be highly volatile, fluctuating due to market sentiment, liquidity conditions, or changes in open interest. Unexpected spikes or prolonged negative rates could impact the profitability of the delta-neutral strategy.

This graph illustrates the funding rate volatility for SOL perpetual futures over the past year.

1. Cross-Exchange Disparities Since Unipay interacts with both decentralized and centralized exchanges, funding rates can vary significantly across platforms. This disparity may affect the efficiency of hedging and yield optimization.

2. Market Stress Scenarios During periods of extreme market stress, such as a sudden crash or rapid price surge, funding rates may become unpredictable, increasing the risk of unprofitable or unstable positions.

3. Liquidity Constraints Insufficient liquidity in futures markets, particularly for less common collateral assets, could hinder Unipay’s ability to maintain effective hedges, exposing the system to greater volatility.

The open interest in perpetual futures reflects the available liquidity across exchanges, ensuring scalability in hedging operations.

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Mitigation Strategies

To address funding rate risk, Unipay implements the following measures:

• Dynamic Rebalancing Unipay actively monitors funding rates across multiple exchanges, dynamically rebalancing positions to optimize yield while minimizing exposure to adverse rates.

• Diversified Collateral By supporting a broad range of assets, including SOL, ETH, and BTC, Unipay reduces reliance on any single market, enhancing overall resilience.

• Multi-Platform Arbitrage Leveraging both decentralized and centralized exchanges allows Unipay to exploit arbitrage opportunities, mitigating the impact of funding rate disparities.

  

  Trading volume for perpetual futures showcases the activity levels, critical for ensuring efficient hedging and arbitrage.
• Risk Monitoring Systems Advanced risk management tools continuously track market conditions, providing early warnings for rate volatility and liquidity issues.

• Hedging Adjustment Protocols In extreme scenarios, Unipay adjusts its hedging strategy to prioritize stability over yield, ensuring the safety of USDu’s peg and collateral.

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Commitment to Stability and Yield

Unipay is dedicated to maintaining a balance between stability and yield, even in volatile market conditions. By proactively managing funding rate risks through sophisticated strategies and diversified collateral, Unipay ensures that USDu remains a reliable and secure yield-bearing stablecoin for users across the globe.

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