Instead of a centralized futures market, Vortex works through decentralized derivative exchanges that offer ‘Perpetual Contracts’ to generate yield.
What are Perpetual Contracts?
Perpetual Contracts are similar to traditional futures, but, as their name suggests, have no expiration or settlement date. They continue perpetually until the position is closed.
This indefinite-until-closed nature means that Perpetuals trade much closer to the current spot price than futures, but, being derivatives, they do still diverge. This price divergence from spot generally reflects the sentiment of traders on the exchange.
It is crucial that this divergence is controlled and the price of Perpetuals are frequently brought back to closely match spot prices.
The mechanism to achieve this control and incentivize spot/Perpetual price stability is known as the ‘Funding Rate’.
What is the Funding Rate?
The Funding Rate is a fee periodically paid from the ‘more popular’ side of the market to the opposing ‘less popular’ side to incentivize contract purchases.
If the Perpetuals price is above the spot price, the Funding Rate will be positive and traders with open long contracts will pay the rate to traders with open short contracts.
Conversely, if the Perpetuals price is below the spot price, the Funding Rate will be negative and open shorts will pay open longs.
How Vortex applies Basis Trading
The crypto markets have historically been weighted towards longs as the majority of participants speculate that prices will go up.
This trend has continued on decentralized derivatives exchanges that offer Perpetual Contracts, which means that Funding Rates have historically, on average, been positive. As a result, from a Funding Rate perspective, it has been profitable to open short positions — but then you may lose a lot more than your Funding Rate returns if prices suddenly moon.
Vortex fixes this by removing the directional price risk from the short position while maintaining the Funding Rate advantage, enabling users to generate market-neutral yields.
Here’s a high-level example of how Vortex works in favorable conditions:
- User deposits 7000 USDC into Vortex, receiving a proportionate share of the vault as Vortex vault tokens.
Assuming 1 ETH = 3500 USDC, Vortex’s underlying strategy will then:
- Send 3500 USDC to a DEX to buy 1 ‘physical’ ETH;
- Send 3500 USDC to a derivatives DEX and use it as collateral to short 1 ETH worth of perpetual contracts.
- Vortex will automatically collect the funding rate and periodically compound and rebalance into both positions, increasing the value of the vault tokens.