According to TechFlow, on October 17, The Block reported that the Ethereum perpetual contract funding rate has reached the high level before the flash crash in early August. Derivatives trader Gordon Grant warned that the cryptocurrency perpetual contract market is still at risk of over-leveraged positions triggering a sell-off, which may be triggered by both technical and macroeconomic factors.
Grant said that changes in the structure of perpetual contract market participants show that the cryptocurrency market remains vulnerable to external shocks. Other factors affecting the market include investors' concerns about a pullback in chip stocks such as Nvidia, a slowdown in China's stock market gains, and continued tensions in the Middle East. Grant believes that these factors, combined with the existing leverage in the crypto market, could trigger or exacerbate short-term market declines.
The emergence of new decentralized finance protocols such as Ethena has increased Ethereum on-chain activity. Ethena's strategy involves stablecoin mining to generate delta-neutral returns while using perpetual contracts to hedge risks. However, such strategies increase sensitivity to funding rates, and negative rates can lead to huge losses.
Grant pointed out that there are currently billions of dollars of short futures positions hedged against long and pledged spot positions, and a sudden drop in funding rates could cause tens of millions of dollars in losses within hours. He emphasized that DeFi lending protocols play an important role in these market dynamics, but the lack of a large number of tokens that can be borrowed for shorting to hedge long futures positions is still a problem.
