How does funding rate arbitrage stabilize perpetual markets?
Funding rate arbitrage incentivizes traders to take positions against the dominant market side to capture premium payments. When longs pay high funding, arbitrageurs short the perpetual contract and hedge with spot assets to neutralize price risk.
This activity reduces market skew by providing the necessary liquidity to counter one-sided directional bias. Consequently, this balancing mechanism forces perpetual prices back into alignment with the underlying spot market.
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