How to Make Money in a Sluggish Market? A Complete Guide to Hedging and Arbitraging on Perp DEX Dual Platforms

Recently, the price performance of the Perp DEX track has not been ideal. HYPE has dropped from its peak to $21, LIT has maintained at $1.7, and ParaDEX has encountered issues, making the entire sector look a bit sluggish.

Interestingly, the enthusiasm for this track does not seem to have cooled down as a result. On the contrary, many players are more actively farming projects that have not yet issued tokens, as a small bear market is the best time to accumulate points, which will be more competitive when the market improves and tokens are issued.

Two weeks ago, I wrote a project introduction titled “After Lighter, the Next Batch of Perp DEX Worth Noticing,” and received a lot of feedback from friends. Many newcomers learned about platforms worth paying attention to, but they were still confused about how to operate, how to open and close positions, and how to maximize point weight. Thus, today’s detailed practical tutorial was created, which is very suitable for beginners to get started. For demonstration purposes, I mainly chose Variational and Extended, two Perp DEXs that seem to have decent trading volume and background.

1. Essential Preparations: Initial Setup

Before starting, you need to prepare 2 EVM wallets (it is recommended to use two different wallet addresses for operation, not the same one, to reduce the risk of being identified as a witch attack by the project team). I would recommend Metamask or Zerion wallet.

Currently, most Perp DEXs support deposits on the Arbitrum network, so preparing USDC on the Arbitrum network will generally allow you to navigate Perp DEXs smoothly.

Currently, Variational only supports deposits of USDC on Arbitrum, while Extended supports a wider range of chains, including Ethereum, Arbitrum, Base, BSC, Avalanche, and Polygon, but the currency is still USDC.

Additionally, the competition in the perp DEX track is quite fierce, and each platform has special rewards in their invitation mechanisms. Currently, Variational requires an invitation code to use; my invitation code is OMNI796TLUPK, or you can also find it on Twitter. Some higher-level invitation codes or ambassador codes will offer varying degrees of rebates or fee discounts. For example, on the Extended platform, invited users can enjoy a 10% discount on commissions until their total trading volume reaches $50 million.

2. Beginner-Friendly: Dual Platform Hedging for Points

After completing the previous steps of depositing USDC and preparing, we will now enter the practical operation phase: selecting the market, setting leverage, and placing orders. Here, we will first use the simplest and most stable hedging strategy to earn points.

The core principle is to hedge against price volatility risks by opening reverse positions on different DEXs. For example, while going long on Variational, you would go short on Extended with an equal scale and multiple, so that regardless of how the price fluctuates, the profits and losses on both sides can offset each other. The main cost incurred is the transaction fees, but you can steadily earn point rewards.

In terms of specific operations, since Extended's fee structure is more favorable for Maker orders, the optimal approach is to first place a Maker order close to the market price on Extended to enjoy the platform's rebate. Then, when the Extended order is executed, quickly open a Taker order on Variational at market price to fill the order. This way, the positions are hedged, and we essentially incur some platform fees, spreads, and slippage to earn point rewards.

Additionally, here’s a practical tip. There is a "Play order fill sound" switch in the settings at the top right of Variational; remember to turn it on. Extended also has a "Disable sound" option at the top right; make sure not to check it. The benefit of this setup is that when a Maker order on Extended is filled, you will receive an audio prompt, allowing you to immediately react and open a Taker order on Variational. If you manage this timing well, it can effectively reduce slippage losses caused by price fluctuations.

When closing positions, set stop-loss and take-profit prices in advance, which can also be at the same profit-loss ratio or price points. I would suggest keeping the Extended account profitable while allowing the Variational account to incur losses. Why do this? Because Variational has an interesting mechanism: once you reach Bronze level (trading volume of $1 million in 30 days), there will be a loss refund lottery mechanism. Although the probability is low, between 0%-3%, the higher the level, the higher the chance of winning. If you win, the compensation amount will be the lower of your actual loss or 20% of the total funds in the loss compensation pool. So keeping losses in the Variational account gives you a chance to recover some of the losses.

Once you are familiar with this operation, we can increase the difficulty by widening the spread on Variational. (The spread is the difference between the buying and selling prices, which is also the transaction cost for users; the smaller the spread, the lower the transaction cost).

Even though the point weight on Variational may have slight weekly fluctuations, fundamentally, since Variational profits through the Omni Liquidity Provider's spread arbitrage mechanism, there is only one market maker on Variational, which is Variational itself. Therefore, when you open a position on Variational, the platform will charge a spread of 4-6 basis points, and then simultaneously open a reverse position on other external trading platforms to hedge the risk, profiting from the internal and external price differences. Many experienced players have discovered a pattern through repeated testing: the larger the spread, the more Variational earns, and correspondingly, the higher the point weight given to users. This gives us an idea that to maximize point weight, we need to find ways to increase the spread.

Based on the principles discussed earlier, we know that ways to reduce the spread include trading mainstream coins like BTC or ETH and choosing liquidity-rich time periods. Conversely, to increase the spread, we can trade small coins with lower liquidity, as the spreads for altcoins are generally larger than for mainstream coins. Additionally, we can choose time periods with lower liquidity, such as weekends or Asian nighttime. This way, the weight will be relatively high. On this basis, we can also change the coins (don’t always trade the same coins), increase the number of trades, holding duration, and single trade amounts to expand trading volume data.

Moreover, besides the common cryptocurrencies in the crypto space, both Extended and edgeX platforms also support trading of traditional financial assets. Extended currently offers a relatively rich selection, covering indices like the S&P 500 and NASDAQ, forex like EUR/USD, precious metals like gold and silver, and commodities like oil, totaling six varieties. EdgeX currently only lists the S&P 500 and Nvidia.

Since both platforms have the S&P 500 index, there is another hedging opportunity. We can also perform hedging between Extended and edgeX for the S&P 500 to enrich the entire trading system. The operation method is exactly the same as the previous hedging with the same coins between Variational and Extended: one goes long while the other goes short, locking in risks to earn points. However, due to the closing mechanism of TradFi assets, it is best to trade during US stock market hours for simpler operations.

3. Advanced Play: Long Position Strategy for Mainstream Coins

The small coin and TradFi asset hedging mentioned earlier, while having high point weight due to larger spreads, also has a significant shortcoming—poor liquidity. This means that such strategies are only suitable for short-term operations, quickly entering and exiting to accumulate trading volume, and are not suitable for long-term holding. After all, during times of low liquidity, price fluctuations can be quite severe, and holding for too long can increase risks.

Therefore, to make the entire trading system more complete and also improve the holding duration IO metric, which is also a very important point weight, we can intersperse long positions in mainstream coins during times when we are not monitoring the market. For instance, during the day when you are at work or before going to bed at night, you can open long positions in liquid mainstream coins like BTC and ETH to naturally extend the holding time.

In terms of specific operations, you can implement a hedging strategy between BTC and ETH on Variational. You can observe the relative strength relationship between these two coins; when one rises 2-3% compared to the other, go long on the slower-rising one while shorting the faster-rising one. The logic behind this strategy is that BTC and ETH have a high correlation in their long-term trends, and deviations in the short term often revert. The holding time can be slightly longer, from 8 to 12 hours or even longer; as long as one side starts to profit, you can consider closing the position. Even if there is a temporary floating loss, don’t rush to stop-loss; just hold according to plan.

The advantage of this strategy is that it compensates for the previous strategy's flaw of only placing market orders on Variational; this strategy allows for more use of limit orders, making it look more like real trading rather than just volume brushing.

However, I must remind you that even with mainstream coins, overnight holding is not highly recommended. The crypto market operates 24/7, and if a sudden market crash or black swan event occurs, the hedged positions may not be adjusted in time, leading to liquidation, which would be counterproductive. Keep the leverage ratio not too high; for mainstream coins, staying within 20x is sufficient, with safety as the priority.

Additionally, Extended can also implement some strategies based on the characteristics of its vault. Extended Vault Shares, abbreviated as XVS, has a clever design where 90% of the value of XVS is counted towards your account's net worth and available trading balance, which is more comprehensive than what Hyperliquid offers.

Assuming you have 1000 USDC in your account, your net worth and available balance would both be $1000. When you deposit this 1000 USDC into the vault and receive an equivalent amount of XVS, your net worth and available balance change to $900. Then, if you open a long position of $1000 in BTC with 4x leverage, your net worth remains $900, but your available balance becomes $650 ($900 minus $1000 divided by 4 for margin usage). If this BTC long position has a floating profit of $100, your net worth rises to $1000, and your available balance also increases to $750. Throughout this process, your principal remains in the vault earning APR while also supporting your trading position.

The returns from the Extended vault are divided into two parts: basic returns and additional returns. The APR for the past 30 days is 24.92%. The basic return is what all depositors can receive, currently at 4.14% APR, reflected through the continuous rise in XVS prices. The vault's revenue sources are similar to other Perp DEXs, mainly from market-making trading and liquidation fees. The additional return is linked to the account's trading activity; starting from the Knight level, you can enjoy additional returns, with the highest currently being 20.78% APR.

4. Advanced Skills: Funding Rate Arbitrage

What has been discussed so far involves earning points through hedging. Next, let’s talk about a more advanced strategy, which is to profit from the differences in funding rates between different platforms. This strategy is solid because it not only allows you to earn points but also generates real profits, although it is slightly more complex and not suitable for beginners.

Before discussing the strategy, let’s explain what the funding rate is. Perpetual contracts differ from traditional futures in that they do not have an expiration date. To anchor the contract price to the spot price, exchanges have designed a mechanism where both long and short parties periodically pay each other a funding fee. When market sentiment is bullish and the contract price is higher than the spot price, the funding rate is positive, meaning long positions pay short positions; conversely, when market sentiment is bearish and the contract price is lower than the spot price, the funding rate is negative, meaning short positions pay long positions.

Since the funding rates for the same coin can vary significantly across different platforms, this presents us with arbitrage opportunities. Ideally, you would go long on the platform with a lower rate and short on the platform with a higher rate, allowing you to collect fees from both sides. Generally speaking, finding a funding rate difference already meets the trading conditions, and then the operation is the same as before, with the same leverage and position size.

What are the benefits of this operation? First, after hedging long and short positions, you are completely neutral to BTC price fluctuations; the ups and downs do not affect your total assets. Second, when you go long on Variational, you have to pay the funding fee, but when you go short on Extended, you can collect the funding fee. If the funding rate on Extended is higher, you can earn that price difference.

For example, on January 15, the funding rate arbitrage opportunity for the IP coin between different platforms reached an annualized 953%. What does that mean? If you invest $10,000, theoretically, you could earn $9,530 in a year, although this is an ideal scenario; in reality, funding rates fluctuate and cannot maintain such high levels consistently. The arbitrage opportunity for the BERA coin on that day was also annualized at 435%. You can refer to @0xfarmed’s post for more details.

In practice, these high-yield opportunities often arise with new coins that have low FDV (Fully Diluted Valuation). These coins have small circulation, and market sentiment can easily become extreme, leading to significant fluctuations in funding rates.

Here, we need to monitor the funding rates on different platforms and identify the funding rates for perpetual contracts in the markets of the two platforms. We can use tools like SmartArbitrage, which can display arbitrage opportunities in real-time across platforms. Variational’s API and Extended also have visual funding rate comparison interfaces. Additionally, there is a Telegram bot @lighterarbitragebot that will automatically push notifications for arbitrage opportunities. Once you notice that the funding rate difference starts to narrow or that one side's rate turns negative, you can consider closing your positions.