Funding Rate Risk

The native yield of sUSDh is generated by a positive funding rate incurred by the short position backing the Bitcoin-native bond. While on average the funding rate is positive (yield generating), it is possible that at times, typically during bear markets, the funding rate can go negative. This means that the position held by Hermetica incurs a cost. This deteriorates the collateral of the USDh hedged position and causes a loss in value.

Mitigation

We mitigate this risk by having the Hermetica Reserve Fund that kicks in every time negative funding has to be paid. Using historical funding data as well as forward looking analysis, we have determined a safe initial size of the insurance fund that makes the risk of depletion due to negative funding unlikely. In addition, the Hermetica Reserve Fund grows over time, as a fraction of the positive funding is fed into the Reserve Fund. We adjust this fraction according to market conditions.