[Gauntlet] - Jupiter Perpetuals Optimization: Borrowing Rate Reduction and Competitive Analysis vs. OKX and Bybit

gauntlet · August 19, 2024, 3:59pm

Executive Summary

1. Borrowing Rate Recommendations:

Uniform decrease from 0.01% to 0.008% per hour for SOL, ETH, and BTC.

2. Competitive Analysis:

Jupiter remains attractive for large traders across the leading CEX exchanges - Binance, OKX, & ByBit. For longer holding periods, centralized venues remain more competitive from a financing perspective through funding rate behavior. These conclusions help inform our view pertaining to the direction of borrowing rate parameters on Jupiter.
vs OKX:
- Jupiter has a clear advantage for short-term trades (2-12 hours) across all markets and trade sizes.
- OKX becomes more cost-effective for longer holding periods (24-120 hours), especially for smaller trades.
vs Bybit:
- Jupiter shows a slight edge in short-term trading, particularly for larger trade sizes.
- Bybit gains an advantage for trades held beyond 24 hours due to lower funding costs.

Jupiter Borrowing Rates Recommendations

Market	Current (bps/hr)	Recommended (bps/hr)
SOL	.01%	.008%
ETH	.01%	.008%
BTC	.01%	.008%

Recommendations Summary

Based on the current market dynamics and asset performance, we recommend the following adjustments to Jupiter’s borrowing rates:

SOL: Decrease from 0.01% to 0.008% per hour
ETH: Decrease from 0.01% to 0.008% per hour
BTC: Decrease from 0.01% to 0.008% per hour

Detailed Analysis and Rationale

Methodology Overview

Gauntlet utilizes asset volatility measures, realized utilization, and a target utilization level of 80% to derive recommendations.

Capped Based Implementation

Gauntlet’s methodology for deriving borrowing rate parameters can result in large recommended changes. To ensure parameter changes do not create unintended side-effects, we cap all changes by 20% between parameter recommendations. Gauntlet plans to re-assess conditions weekly and continue processing reductions if the market sees fit.

Asset-Specific Analysis

Solana (SOL):

Unlike its counterparts, SOL has shown increased volatility, with a current blended volatility of 82.46%. The asset’s utilization has reached approximately 45% by the end of the observed period, signaling moderate demand. Given these factors, we recommend decreasing the borrowing rate for SOL from 0.01% to 0.008% per hour, aligning with the other assets while still accounting for its higher volatility.

Recommended hourly borrowing rate: 0.008%
Recommended borrowing rate APR (cap): 70.08%
Recommended borrowing rate APR: 46.35%
SOL Volatility: 82.46%
SOL Utilization: 44.97%

The updated capped recommendation for Solana will improve the experience for traders, making trading cheaper, given the current utilization levels. It should be noted that an increase in Ut is expected since borrowing costs will be closer to Binance funding rates.

In general, funding rates on Binance for SOL have been significantly lower on Binance vs borrowing rates on Jupiter. It’s important to gradually shrink this gap by reducing borrow fees by 20%, evaluating the impact of trading volume, and creating training data, and if volume increases by more than 20%, we can proceed with another borrow fee cut until we get to the target rates of 46.35%.

Ethereum (ETH):

Ethereum has shown a decrease in utilization and volatility. The current utilization for ETH is around 23%, indicating a decrease in borrowing demand. Volatility for ETH has also decreased, with the current blended volatility at 64.58%. Given the decreased utilization and stabilizing volatility, we recommend reducing the borrowing rate for ETH from 0.01% to 0.008% per hour.

Recommended hourly borrowing rate: 0.008%
Recommended borrowing rate APR (cap): 70.08%
Recommended borrowing rate APR: 18.49%
ETH volatility: 64.58%
ETH Utilization: 22.90%

The updated capped recommendation for Ethereum will improve traders’ experience and, given the current utilization levels, make trading cheaper.

Ethereum funding rates on Binance are closer to the current Jupiter borrow fees but still need to be reduced.

Bitcoin (BTC):

Bitcoin has shown similar patterns to Ethereum in terms of decreased utilization and volatility. The current utilization for BTC is around 49%, which is higher than ETH but still moderate. BTC’s current blended volatility is 48.58%, lower than both SOL and ETH. We recommend reducing the borrowing rate for BTC from 0.01% to 0.008% per hour, consistent with the other assets.

Recommended hourly borrowing rate: 0.008%
Recommended borrowing rate APR (cap): 70.08%
Recommended borrowing rate APR: 29.68%
BTC volatility: 48.58%
BTC Utilization: 48.88%

The updated capped recommendation for Bitcoin will improve traders’ experience and, given the current utilization levels, make trading cheaper.

These adjustments aim to enhance the attractiveness of these assets for borrowers while maintaining appropriate risk-adjusted returns for lenders, considering the current market conditions and utilization rates.

Market Dynamics and Competitive Analysis

This analysis combines both the detailed heatmap review and the broader comparison of all-in costs between Jupiter and Bybit across three cryptocurrency markets: SOL (Solana), BTC (Bitcoin), and ETH (Ethereum). The primary focus is on how trade size, holding period, and funding rates influence the overall cost advantage or disadvantage when trading on these platforms. Data is from August 1, 2024.

SOL (Solana) Market:

Heatmap Analysis:

Short Holding Periods (2 to 12 Hours):
- Trade Size of $70,000: Jupiter shows a slight cost advantage over Bybit for short holding periods, with differences ranging from -0.01% to 0%.
- Trade Size of $420,000: The cost advantage is more noticeable, ranging from -0.08% to 0.01%.
- Trade Size of $2,500,000: The advantage is most pronounced at the largest trade size, with a difference starting at -1.47% and narrowing to -1.43% over 12 hours.
Mid to Long Holding Periods (24 to 120 Hours):
- Trade Size of $70,000: Bybit becomes more cost-effective after 24 hours, with Jupiter’s costs rising to 0.45% higher by 120 hours.
- Trade Size of $420,000: The cost disadvantage for Jupiter increases to 0.39% by 120 hours.
- Trade Size of $2,500,000: While Jupiter maintains a small advantage up to 72 hours, Bybit becomes more cost-effective as the holding period extends, with Jupiter’s costs narrowing to 0.01% by 120 hours.

All-In Trading Fees: Jupiter has lower trading fees compared to Bybit, which is favorable for shorter holding periods.

Long Funding: Despite lower trading fees, the higher funding rate on Jupiter leads to increasing costs over time, which explains the heatmap’s shift towards a disadvantage for longer holding periods.

Overall Insights:

Short-Term Trading: Jupiter is advantageous for large trades held for short periods due to its lower trading fees.
Long-Term Holding: As the holding period extends, Bybit’s lower funding rates outweigh the initial fee advantage, especially for smaller trades, making it more cost-effective.

BTC (Bitcoin) Market:

Heatmap Analysis:

Short Holding Periods (2 to 12 Hours):
- Trade Size of $70,000: Jupiter offers a small cost advantage initially, but the difference is minor (-0.00% to 0.05%).
- Trade Size of $420,000: The advantage for Jupiter diminishes quickly, with costs nearly equal by 24 hours.
- Trade Size of $2,500,000: Jupiter starts with a small advantage, but it dissipates by 72 hours, and by 120 hours, Bybit is more cost-effective.
Mid to Long Holding Periods (24 to 120 Hours):
- Trade Size of $70,000: Bybit takes the lead after 24 hours, with a 0.47% cost advantage by 120 hours.
- Trade Size of $420,000: Jupiter’s advantage disappears after 24 hours, and Bybit becomes more cost-effective by 120 hours.
- Trade Size of $2,500,000: Jupiter’s initial advantage fades, and Bybit becomes the more economical choice by 120 hours.

Overall Insights:

Short-Term Trading: Jupiter’s lower trading fees give it a slight edge for short-term trades.
Long-Term Holding: Bybit becomes the better option for trades held beyond 24 hours due to lower funding costs.

All-In Trading Fees: Similar to SOL, Jupiter’s trading fees are lower than Bybit’s, benefiting shorter trades.

Long Funding: The higher funding rate on Jupiter causes the overall cost to increase over time, especially for longer holding periods, as reflected in the heatmap

ETH (Ethereum) Market:

Heatmap Analysis:

Short Holding Periods (2 to 12 Hours):
- Trade Size of $70,000: Jupiter has a negligible advantage for holding periods up to 12 hours, with differences ranging from 0% to 0.04%.
- Trade Size of $420,000: The initial advantage is slightly stronger (-0.03% to -0.01%) but diminishes quickly.
- Trade Size of $2,500,000: Jupiter starts with a more substantial advantage but it fades as the holding period extends.
Mid to Long Holding Periods (24 to 120 Hours):
- Trade Size of $70,000: Bybit overtakes Jupiter after 24 hours, with a 0.23% cost advantage by 120 hours.
- Trade Size of $420,000: Bybit becomes more cost-effective after 24 hours, with Jupiter showing a 0.20% higher cost by 120 hours.
- Trade Size of $2,500,000: Jupiter’s advantage diminishes by 72 hours, and Bybit is slightly more cost-effective by 120 hours.

All-In Trading Fees: Lower fees on Jupiter remain an advantage, but the impact is reduced as holding periods lengthen.

Long Funding: The higher funding rate on Jupiter leads to an increase in costs, which diminishes the initial cost advantage seen with shorter holding periods and larger trades.

Overall Insights:

Short-Term Trading: Jupiter’s lower fees provide a modest advantage for short-term trades.
Long-Term Holding: Bybit’s lower funding rates make it the better option for longer holding periods, particularly for smaller trades.

Combined Key Takeaways:

Short-Term Trading (2 to 12 Hours):

Jupiter’s Advantage: Jupiter offers a consistent cost advantage across all markets and trade sizes due to its lower trading fees, especially for large trades.
Best for Larger Trades: The benefit is more pronounced for larger trades ($2.5 million), where Jupiter’s lower fees substantially reduce overall costs.

Mid to Long-Term Holding (24 to 120 Hours):

Bybit’s Advantage: As holding periods extend, Bybit becomes more cost-effective across all markets due to its lower funding rates. This trend is particularly strong for smaller trade sizes and holding periods beyond 24 hours.
Long-Term Strategy: Traders planning to hold positions for more than 24 hours should consider Bybit, especially if trading smaller amounts.

Trade Size Considerations:

Larger Trades Favor Jupiter: For very large trades, Jupiter’s fee structure provides a significant advantage, though this diminishes over longer holding periods.
Smaller Trades Favor Bybit: Bybit tends to become more competitive as trade sizes decrease, particularly for longer holding periods.

Conclusion:

Jupiter is generally more cost-effective for short-term, high-volume trading. However, for trades held over longer periods, particularly with smaller amounts, Bybit’s lower funding rates make it the more economical choice. To improve its competitiveness, Jupiter should focus on optimizing its borrow rates.