Basis vs Funding Arbitrage

FYOS supports two strategy families. Understanding their differences helps you use each appropriately.

Strategy Overview

Funding Arbitrage

What it is: Capturing funding rate payments on perpetual futures

Mechanism:

1. Hold a spot position
2. Hedge with a perpetual futures short
3. Collect (or pay) funding payments every 8 hours
4. No fixed end date

Key characteristic: Variable, ongoing carry tied to funding rate behavior

Basis / Cash & Carry

What it is: Capturing the spot-futures spread on delivery contracts

Mechanism:

1. Buy spot
2. Sell delivery futures
3. Hold until contract expiry
4. Prices converge at settlement

Key characteristic: Fixed, expiry-linked carry tied to initial spread

Side-by-Side Comparison

Return Behavior

Funding

Funding returns are variable:

• Funding rates change every 8 hours
• FYOS models persistence using half-life decay
• Edge value decays probabilistically over time
• Realized returns depend on future funding behavior

Basis

Basis returns are fixed at entry (for hold-to-expiry):

• The spread is locked when you enter
• Expiry convergence is deterministic (barring defaults)
• No dependency on ongoing rate changes
• Early exit introduces convergence uncertainty

Risk Profile

Funding

• Funding rate reversal: Rates can flip direction
• Crowding: Popular opportunities may see compressed returns
• Persistence risk: Edge may decay faster than expected
• No fixed end: Requires active management or exit decision

Basis

• Execution costs: Fees and slippage on both legs
• Capacity constraints: Limited by the smaller leg
• Inverse contract risk: Non-linear P&L if coin-margined
• Early exit risk: Basis may not converge linearly before expiry
• Fixed commitment: Capital locked until expiry or early exit

Capacity Semantics

Funding

Single-leg conceptually: Capacity is primarily about the perpetual futures side

Primary capacity signal: edge_capacity_24h

Basis

Dual-leg structurally: Both spot and futures capacity matter

Primary capacity signal: dual_leg_capacity_usd

The limiting leg constrains the whole trade.

Trust Philosophy

Both strategies share the FYOS trust framework:

• Trust qualification gates surface-ready opportunities
• Trust is separate from economics
• High APR does not override low trust
• Reality adjustments apply to both families

The same principles apply:

• Score is not deployability
• Simulator output is not forecast truth
• Planner output is not execution instruction

Planner Role

When both strategies are enabled, the planner can allocate across both:

• Funding-first mode: Allocate funding first, use basis as parking sleeve
• Direct mixed mode: Funding and basis compete in unified optimization

The planner enforces strategy-specific constraints:

• Basis share limits
• Expiry bucket concentration
• Inverse contract limits

When To Consider Each

Consider Funding When:

• You want flexible duration
• You're comfortable with variable returns
• You want to capture ongoing funding dynamics
• You don't mind active monitoring

Consider Basis When:

• You want predictable, fixed returns
• You're willing to lock capital to expiry
• The basis spread offers attractive economics after costs
• You have capacity on both legs

They Are Complementary

FYOS treats funding and basis as complementary strategies:

• Different return profiles
• Different risk characteristics
• Different capacity structures
• Same trust and reality philosophy

A diversified approach may include both, weighted by your risk tolerance and capital availability.

Summary

Choose based on your objectives, not just APR comparison.