The Funding Rate Market Unlock

Composable Primitives for Innovation

Funding Rate Markets: An Overview

To date, perpetual funding rates have been treated as either an implicit tax or subsidy embedded in perps trading rather than a direct market primitive. With recent unlocks like Boros’ creation of tokenized funding rate markets, these derivatives are evolving into a standalone asset class, allowing them to be traded, hedged, and composed into innovative structured products. This unlock parallels the 1980’s Eurodollar futures impact in traditional finance, where interest rate derivatives evolved from a niche institutional hedge into one of the most traded products globally, with global markets today clearing over $1.2 trillion daily in interest rate swaps. From a revenue standpoint, an early DeFi counterpart like Boros exhibits multiple monetization vectors – including swap fees, open interest fees, and operation fees – and has shown strong traction within its first week, posting $110 million in notional volume traded and $33 million in OI between its two supported markets.

Funding Rate Volatility vs. Underlying Price Volatility (source: Coinglass)

While nascent, this newly-created market structure opens a relatively promising category in DeFi whereby highly volatile funding rates can be structurally hedged and successful providers stand to capture meaningful revenue downstream.

What Does This Mean for DeFi?

By looking at this from a historical perspective and projecting forward to the evolving DeFi landscape, these funding rate markets are positioned to offer several notable unlocks.

The Eurodollar Futures Moment for DeFi

An interesting parallel to funding rate markets can be drawn to the creation of Eurodollar futures by the CME Group in 1981. At the time, interest rate risk management was fragmented and there was no liquid standardized instrument to hedge exposures tied to foreign USD deposits. Eurodollar futures solved this gap by packaging forward interest rate expectations into standardized contracts that rapidly became the most actively traded in the world. Daily volumes have exceeded trillions of dollars notional, generating billions in annual exchange revenue. These markets also catalyzed a new category of financial products downstream, including forward rate agreements, interest rate swaps, and structured notes, each part of the broader interest rate derivatives market that dwarfs all others globally.

90-Day Average Spot and Derivatives Volume (source: TokenInsight)

Today in DeFi, the derivatives market has roughly 3.9x the average daily volume of the spot market, and perps dominate the derivatives market with a current annualized volume of over $7 trillion. Despite this depth, we’re only now seeing truly standardized primitives to hedge or trade the embedded funding rate at the heart of perps. While Eurodollar futures unlocked the largest derivatives category in TradFi, funding rate markets may represent a similar parallel for DeFi. The growing scale of perps activity implies a wide addressable market for protocols building innovative solutions in this area.

Institutional Risk Management

As perps volumes continue to proliferate and innovations like Hyperliquid’s HIP-3 model unlock new perps markets for a wide spectrum of (increasingly long-tail) assets, participating institutions will naturally accumulate more funding rate risk, especially in basis trades, delta-neutral strategies, and market making. Multibillion-dollar protocols like Ethena face this risk daily due to being structurally short perps (Ethena faced negative funding rates 10.4% of all days over the last year) but will soon be able to hedge by essentially fixing the amount of funding rate they pay via an available secondary market. For example, by selling Boros “yield units” to receive fixed funding upfront, they can hedge against rates turning negative. 

Importantly, more sophisticated institutions will increasingly require stronger risk management frameworks in order to scale their perps usage. Just as banks don’t hold large floating-rate loan books unhedged bust instead use interest rate swaps to convert floating rates to fixed, institutions in DeFi will seek similar solutions to manage funding rate volatility. This implies structural business opportunities for the teams that can successfully create the necessary infrastructure and applications to treat funding rates as a tradeable asset class, helping protocols stabilize their revenue streams and prevent tail risk from funding crashes.

Enabling Structured Product Innovation in DeFi

Funding rate markets also create a new substrate for structured product innovation across DeFi, suggesting future business models with meaningful revenue to back. Beyond the obvious utility for delta-neutral and basis traders, funding rate markets allow protocols to build and incorporate these historically esoteric assets into other frameworks. For example, yield units could be integrated as collateral in vaults or lending pools, allowing traders to access liquidity without closing their funding exposure, and enabling protocols to design lending markets with more sophisticated hedging strategies. The result is more balance-sheet efficiency without ever losing exposure to funding rate positions as a hedge. 

Models like these imply multiple potential revenue levers. In this context, the protocol that accepts tokenized funding rates as collateral might stand to earn interest spreads and liquidation fees, much like Aave or Compound takes a margin of the lender-side yield. Protocols issuing the yield units (e.g., Boros’ structure) can earn flat swap fees for each position and open-interest fees (charged at every settlement interval). Moreover, if these yield units are eventually traded on a DEX, AMM, or dedicated orderbook, a platform stands to capture volume-driven transaction fees.
The broader implication here is that funding rate derivatives are natively composable and will likely integrate more broadly across the existing DeFi stack. As more standardized instruments are created, they may proliferate across verticals, with each integration point representing a new distribution channel and a new source of potential fee capture. This positions them as a primitive with the ability to scale both horizontally across DeFi and vertically into new structured products. 

Market-Neutral Revenue Potential

A perhaps underappreciated strength of funding rate markets is that they’re positioned to generate recurring activity across different market regimes. Unlike directional speculation, hedging funding rate exposure is an inherent need for groups like market makers, delta-neutral funds, and basis traders. As perps continue to dominate crypto derivatives, there will be constant demand to manage the variability of funding flows.

This mirrors the dynamic in TradFi rate markets where interest rate swaps, futures, and forward rate agreements consistently drive volume regardless of whether rates are rising, falling, or flat. Institutions don’t trade these products solely to speculate but rather to hedge balance sheets and stabilize earnings. The result is largely more predictable and repeatable transactions that generate billions in fee revenue for exchanges and clearinghouses. Assuming healthy and continuous perps utilization, funding rate derivatives naturally imply a similar opportunity onchain with more volume-driven rather than directionally dependent business models.

Category Risks

Ultimately, the early-stage nature of these funding rate markets create some primary risks for the category. They inherently face a liquidity cold start problem, as successful hedging only works if orderbooks are deep enough to avoid slippage and primitives are currently very nascent. As the markets for these primitives deepen, early-stage companies will likely face severe competition from both frontends and backends with already-established perps integration since they possess a structural advantage in both liquidity and distribution. 

This is also an unproven vertical; funding rates are well understood but incorporating them as standalone derivatives is largely unexplored and adoption curves are therefore uncertain. Competitive moats may prove fragile as larger exchanges or lending platforms try to integrate similar products and outcompete smaller protocols with superior liquidity and distribution. There’s somewhat of an existing complexity barrier as well, suggesting these markets may remain primarily driven by institutions in the near term with lower retail penetration coming mostly in the form of funding rate speculation. 

Market Dynamics and Opportunities

Boros’ model represents an early step toward the creation of tokenized markets for funding rates, but its unlock implies that new products will emerge downstream as the secondary markets for these flows deepen. In TradFi, this has proven to be a winner-take-most category given liquidity concentration and clearinghouse dominance (e.g., CME’s 99% market share dominance in interest rate futures). In DeFi, the competitive dynamics will likely prove different by nature of crypto being open-source, forkable, and reliant on oftentimes more mercenary user bases. As a result, the design space for funding rate primitives is vast and relatively nascent for protocols to offer innovative services at both the infrastructure and application layer. 

While funding rates today are mostly treated as a byproduct of perps trading, deep markets seem likely to emerge that institutional players can rely on for hedging and positioning. In doing so, these primitives may find horizontal scalability across assets and vertical composability across DeFi protocols. 

To these ends, any market with an oracle-verifiable yield (e.g. staking, real-world credit, TradFi borrow/lend) could see standardized rate contracts emerge. Teams are increasingly experimenting with yield-bearing assets as liquid collateral, with protocols like Notional tokenizing levered yield strategies that can be pledged across other protocols like Morpho. At a high level, models like Boros and Notional wrap a variable cash flow into a token that can be reliably marked by onchain oracles, allowing it to be whitelisted as collateral across other protocols. 

The primary thesis here is that funding rate markets represent not just secondary exposure to perps volumes but a new substrate for both risk management and innovation. The protocols building new products around these primitives will likely gain new monetization vectors as well as open the door to structured product innovation that could parallel the foundational interest rate derivatives industry in TradFi. Looking ahead, opportunities may arise for infrastructure providers to capture recurring flows for these derivatives (via issuance or settlement) and apps that wrap funding rate exposure into useful products. In this context, value will likely accrue to protocols that best position themselves as distribution rails for these new primitives across DeFi.