Phillip is co-founder and CEO at DigOpp.
Digital asset markets have been vibrant recently, and this has been a great respite after almost two years of crypto winter. I do not want to throw a wet towel on current sentiment, but it is good to remember that the seeds of the next crash are often sown during the good times.
During the last bullish cycle, lenders increased the violence of the implosions that we witnessed. Leverage was hidden across a network of entities , with concentration at certain nodes . The lenders of the old-world are largely gone, but there is a new source of liquidity: prime brokers . Funding arbitrage is a strategy which benefits from market demand to go long via derivatives. This exploits the funding interest rates paid out from perpetual swaps by going long on spot and short perpetual swaps . This generates attractive yields and exploits market demand to go levered long, while not exposing the strategy to directional market moves. If the strategy is implemented well, the risk is very low, which makes it a popular strategy for PBs to lend to.
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