How does perpetual futures funding rate arbitrage really work?

[nihalsari]

Perpetual swaps are futures with no expiry. Exchanges use a funding rate to keep the contract price aligned with the spot price.
When the perpetual trades above spot, longs pay shorts; when below, shorts pay longs.

Funding-rate arbitrage exploits this by:

Going long spot (holding the underlying asset).

Shorting perpetuals equal to that spot position.

If the funding rate is positive, the trader collects funding payments with near market-neutral risk.
The key considerations:

Exchange risk: Keeping funds on centralized exchanges introduces counterparty risk.

Execution costs: Fees and slippage can eat profits.

Basis changes: A sudden move in the spot-perp spread can cause temporary PnL swings.

Many professional market makers automate this with bots to capture low but steady returns, effectively turning volatility into income.