🔌Understanding Basis Spread in Solenes’s Derivatives Strategy

The basis spread refers to the price difference between the spot price of an asset and its corresponding futures price. This spread can be leveraged to generate revenue and stabilize the USDs peg by capitalizing on market inefficiencies through a basis trade.

What is a Basis Trade?

In a basis trade, a trader simultaneously takes opposing positions in the spot and futures markets for the same asset. Here’s how it works:

● Basis Definition: The basis is the difference between the futures contract price and the current spot price of the asset.

● Convergence: As the futures contract nears its expiration date, its price typically converges toward the spot price. At expiration, the basis reaches zero, as the futures price equals the spot price.

Basis Trade in Action

When the futures contract trades at a premium to the spot price, a trader can short the futures contract and go long on the spot asset. As the futures price converges to the spot price at expiration, the trader profits from the basis spread. This approach is commonly used for fixed-expiry futures, which offer a predictable interest rate on the basis trade.

Example of Basis Spread Calculation

Suppose the following conditions:

● Spot Price of SOL: $1,000

● Futures Price (3-month expiry): $1,020

In this scenario:

● Basis Spread: Basis=Futures Price−Spot Price=1,020−1,000=20Bps

Annualizing this for a 3-month period would yield an approximate annual return on the basis trade.

How Solenes Uses Basis Trades

In Solenes, basis trades contribute to revenue by capturing the basis spread in futures contracts. Here’s the process:

1. Identify Premium: When futures prices are higher than spot, Solenes can capitalize on this premium by taking opposing positions in spot and futures markets.

2. Collect Basis Spread: As the futures price converges toward the spot price, Solenes collects the basis, generating a steady return that supports the yield on sUSDs and stabilizes USDs.

By utilizing basis spreads, Solenes can consistently generate revenue from market inefficiencies, enhancing both the stability and sustainability of USDs within the Solana ecosystem.