Plain-English definitions for funding rates, basis, delta-neutral positioning, cash and carry, and the other terms used across this site.
Funding Rate
A funding rate is the periodic payment exchanged between long and short holders of a perpetual futures contract so that the contract’s price stays tethered to spot.
Because a perpetual never expires, exchanges cannot rely on a settlement date to force convergence. When the perpetual trades above spot, longs typically pay shorts; when it trades below, shorts pay longs. The size and sign of that payment are what a funding-rate arbitrage strategy earns or pays. Rates are quoted per interval, not per year, and they move with leverage demand.
Related: Funding Interval · Negative Funding · Funding Rate Arbitrage
Delta-Neutral
A delta-neutral position holds offsetting exposure to the same underlying so that a move in the asset’s price produces roughly equal and opposite P&L on each leg.
In a spot-perpetual pair, long spot is about +1 delta per unit and short perpetual is about −1, netting toward zero. The position is then driven by funding and basis rather than by whether the asset rises or falls. Neutrality is maintained by rebalancing as fills, mark price and hedge ratio drift — it is not set once and forgotten.
Related: Delta Hedging · Market-Neutral · Funding Rate Arbitrage
Delta Hedging
Delta hedging is the process of adjusting position size so that net sensitivity to the underlying price stays inside a defined band.
On a perpetual, mark price, partial fills and basis moves can leave a residual delta. The hedge is rebalanced by adding or reducing one leg until net delta is back inside the limit. Hedging reduces directional risk; it does not remove funding, slippage, liquidation or venue risk.
Related: Delta-Neutral · Slippage
Cash and Carry Trade
A cash and carry trade buys the asset in the spot market and sells a futures contract on the same asset to capture the premium between the two prices.
The position is hedged against price direction: gains on one leg offset losses on the other. Profit comes from the futures premium converging toward spot as expiry approaches — a return that is known, before costs, at the moment the trade is opened. Margin stress on the short leg and venue risk remain.
Related: Cash and Carry Arbitrage · Basis
Cash and Carry Arbitrage
Cash and carry arbitrage is a market-neutral trade that buys an asset in the spot market and simultaneously sells a futures contract on the same asset, capturing the premium between the two prices.
The position is hedged against price direction: whatever the asset does, gains on one leg offset losses on the other. Profit comes from the futures premium converging to spot as expiry approaches — a return that is known at the moment the trade is opened. In crypto, the same logic is applied to perpetual contracts, which have no expiry; there, the premium is collected as a recurring funding payment rather than a single convergence. The main risks are margin stress on the short leg if the asset rallies sharply, and counterparty risk at the venue holding the position.
Related: Funding Rate Arbitrage · Basis
Basis
Basis is the difference between an asset’s spot price and its futures or perpetual price.
A positive basis means the derivative trades at a premium; a negative basis means a discount. Persistent premium is closely linked to positive funding. Basis can compress as more capital chases the same spread, which is one reason funding-arbitrage returns are variable.
Related: Basis Spread · Funding Rate
Perpetual Futures Contract
A perpetual futures contract is a derivative that tracks an underlying asset but has no expiry date.
Dated futures converge to spot at expiry. Perpetuals never expire, so exchanges use a funding rate to keep the contract priced near spot. That recurring payment is the economic core of funding-rate arbitrage. Perpetuals are typically margined and can be liquidated if the short leg is stressed.
Related: Funding Rate · Mark Price
Funding Interval
The funding interval is how often a venue exchanges the funding payment between longs and shorts.
On most major venues the interval is eight hours, commonly at 00:00, 08:00 and 16:00 UTC. Some venues fund hourly. Annualising an interval rate assumes the current print persists, which it will not — use annualised figures only to compare venues, not as a return forecast.
Related: Annualised Funding Rate · Funding Rate
Negative Funding
Negative funding is the state in which shorts pay longs, typically when the perpetual trades below spot.
A standard long-spot / short-perpetual book then pays out on the funding leg instead of collecting. Negative-funding regimes can last days or weeks. They are a normal market feature, not an exception, and they are one of the main ways this strategy loses money on its primary leg.
Related: Funding Rate · Funding Rate Arbitrage
Open Interest
Open interest is the notional value of outstanding perpetual or futures contracts that have not been closed.
Rising open interest with a crowded long book often coincides with higher positive funding; falling interest can accompany a unwind. Reading funding without open interest and basis tells you little about whether a rate is likely to persist.
Related: Funding Rate · Basis
Mark Price
Mark price is the reference price a venue uses for margin and liquidation, as distinct from the last traded price.
Last price can spike on a thin print. Mark price is usually a fair-value blend of index and basis so that liquidations are less likely to be triggered by a single trade. Funding and unrealised P&L on perpetuals are typically computed from mark, not last.
Related: Liquidation · Perpetual Futures Contract
Liquidation
Liquidation is the forced closure of a margined position when collateral falls below the venue’s maintenance requirement.
On a short perpetual, a sharp rally in the underlying consumes margin even if the spot leg is profitable on paper. If the two legs sit on different books or the hedge is late, the short can be liquidated while the long remains. That residual is directional risk the strategy is supposed to avoid.
Related: Mark Price · Delta Hedging
Market-Neutral
A market-neutral strategy seeks return from a spread or relative value rather than from the direction of the broader market.
Funding-rate arbitrage is market-neutral by construction when delta is kept near zero. Neutrality does not mean risk-free: funding can invert, basis can compress, and venue failure is not hedged by holding more coins.
Related: Delta-Neutral · Funding Rate Arbitrage
Annualised Funding Rate
An annualised funding rate scales the current interval payment up to a year, assuming that print never changes.
A rate of 0.01% every eight hours is three payments a day — about 0.03% daily, or roughly 10.95% annualised if it held constant, which it does not. Annualised figures are a comparison tool between venues and assets, not a forecast of what an allocation will earn.
Related: Funding Interval · Funding Rate
Basis Spread
Basis spread is the size of the gap between spot and the derivative, often expressed in percentage or basis points.
A wide premium can mean richer funding; a compressed spread means less to collect. Execution must fill both legs close together or the spread you thought you owned is not the spread you get.
Related: Basis · Slippage
Slippage
Slippage is the difference between the intended price of a hedge and the price at which the order actually fills.
In a two-leg trade, slippage on one side leaves unhedged delta and eats a spread measured in basis points. Thin books, latency between venues, and crowded entries all increase slippage. It is a core execution risk of funding arbitrage, not a rounding error.
Related: Basis Spread · Funding Rate Arbitrage
Counterparty Risk
Counterparty risk is the chance that the venue or custodian holding capital fails to return it — through insolvency, halt, or operational failure.
Funding arbitrage requires balances on trading venues. Exchange failure, withdrawal suspension, or a liquidation cascade on one leg is the largest tail risk in the strategy and is not diversified by holding more assets. Named custody arrangements, when published, belong on the About page.
Related: Liquidation · About
Drawdown
Drawdown is the peak-to-trough decline in the value of an allocation over a period.
Plans publish drawdown limits that constrain how far a book may fall before exposure is reduced. Maximum drawdown is a risk bound, not a promise that losses will stop there in a venue failure or a gap move. Conservative plans use tighter limits and a narrower asset universe.
Related: Fund plans · Strategy
