How can BFUSD generate an average APY of over 30%?

Key Findings

BFUSD offers high APY (recently in the 30-47% range) through income from funding fees and rates, but such returns are dynamic and dependent on market conditions.

A robust Reserve Fund protects users from negative funding rates, providing stability even in bear market conditions.

Backtesting shows that the BFUSD Reserve Fund can withstand extreme market scenarios, providing a robust buffer that is likely to grow over time.

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introduction BFUUSDour exclusive reward-bearing margin asset launched in November 2024 has generated enthusiasm and curiosity, especially regarding its annual percentage yield (APY), which has recently ranged from 30% to 47%. Many users wonder: how is such a high APY possible? How sustainable is it? What are the risks?

In this blog, we will explain how BFUSD generates its profits, explain the role of funding rates and rates, and provide insight into the mechanisms that ensure its stability, including the Reserve Fund. By the end, you should have a much clearer understanding of how BFUSD works and why it is a valuable addition to your trading strategy.

How does BFUSD generate high APY?

The answer lies in the structure of BFUSD. Its daily APY is calculated based on the total income received from the previous day’s staking fees and funding fees. It is important to note that APY is not fixed and past performance does not guarantee future performance.

For example, on November 23, 2024, BFUSD offered an enhanced APY rate of 47.23% when the base rate was 35.11%. This increase in APY was driven by favorable market conditions, including particularly high ETHUSDT funding rates during this period, as evidenced by public data from Binance. financing fee information.

Funding fees, which are affected by market demand and volatility, played a key role in achieving such high returns. By design, BFUSD shares profits generated through these mechanisms as rewards with the Binance community and traders.

Can BFUSD funding fees be negative?

Answer: yes. There will be times when the APY for BFUSD will be negative – especially during a bear market when funding fee income becomes negative.

To mitigate this, BFUSD has a built-in Reserve Fund. When market conditions are favorable, a portion of the total APY is allocated to this Fund. This buffer ensures that users are protected from negative funding fees when the market changes.

For example, as previously mentioned, on November 23, 2024, BFUSD offered a base rate of 35.11% and an increased rate of 47.23% for those actively trading. These rates were supported by favorable market conditions, including particularly high ETHUSDT funding rates that day. In addition to distributing competitive APY to users, BFUSD strategically allocated a portion of revenues during this period to the Reserve Fund.

This allocation enhances the Reserve Fund’s ability to provide protection during periods of negative funding fees, providing long-term stability to BFUSD holders even in less favorable market conditions. However, it is important to understand that the APY of BFUSD is not guaranteed and can sometimes even be zero. Being a dynamic product, its performance depends on market conditions. Past APY performance is no guarantee of future results.

For more detailed information about risks and conditions, please refer to our Frequently Asked Questions And Terms.

Can BFUSD consistently generate high APY despite negative funding rates?

While it is true that derivatives funding rates can go negative, they are predominantly positive—a trend supported by bullish market sentiment and the non-inflationary nature of crypto assets. Let’s take the ETHUSDT trading pair as an example.

Over the past year, the financing rate has been positive 354 out of 365 days. Looking at historical trends, funding rates have been mostly positive on a quarterly basis since the launch of Binance Futures in late 2019. This successful track record underpins BFUSD’s ability to consistently generate APY through funding fees, even in a volatile market.

Above: Binance’s positive ETHUSDT funding days over the past year.

Above: An overview of Binance’s average quarterly perpetual funding rates.

Can the Reserve Fund fully protect users from negative funding rates?

As explained above, we have implemented a robust Reserve Fund to protect BFUSD users from the impact of negative funding rates. At launch, the Fund was invested with US$1 million and its resilience was carefully tested against extreme scenarios.

Testing the Reserve Fund

We backtested using the following assumptions (for illustrative purposes only):

Subscription size: Fixed initial subscription of US$50 million.
Initial reserve fund: 1 million dollars.
ETH APY staking: 3%.
Distribution of the reserve fund: 30%.
Without position reduction: Positions remain unchanged during negative funding scenarios, with the Reserve Fund covering negative funding fees.

Backtesting simulated performance during the 10 worst funding months in Binance Futures history, which featured the most negative funding rates. The chart below shows the size of the Reserve Fund over a 1000-day period after each verified run:

Key Findings

Even in the most difficult conditions, the Reserve Fund has demonstrated its ability to protect users. We estimate that a $1 million reserve fund will not only withstand the stress of the worst historical funding periods, but will likely grow over time.

Constant monitoring

While the backtest confirms the sustainability of the Reserve Fund, Binance strives to consistently monitor and manage the fund to ensure its adequacy. Regular adjustments will be made as necessary to maintain a robust buffer.

Final Thoughts

BFUSD was designed with the community in mind to bring greater value to Binance users through a combination of flexible margins and daily rewards.

In this blog, we looked at how BFUSD generates its high yield through funding fees and staking revenues, existing mechanisms to protect users in difficult market conditions, and the role of the Reserve Fund in providing stability.

Our community’s enthusiasm is inspiring, and we are committed to improving and improving the product to better meet your needs. As we continue to innovate, your feedback will remain at the heart of BFUSD’s evolution. Thank you for your support – together we create a better futures trading experience.

Disclaimer: You are solely responsible for your investment decisions and Binance is not responsible for any losses you may incur. Interest rates (including base rate and premium rate) are calculated daily and expressed as annual percentage yield (APY) for illustrative purposes only. Each fee rate does not reflect BFUSD’s performance for any period other than the specific date indicated and is not indicative of future performance. The amount of compensation will likely vary from day to day. Past performance is not a reliable predictor of future performance. You should invest only in products with which you are familiar and the risks of which you understand. You should carefully consider your investment experience, financial situation, investment objectives and risk tolerance and consult an independent financial advisor before making any investment. BFUSD cannot be withdrawn or used for any purpose other than as margin on a Binance futures account. Redemption restrictions may apply, which may affect your ability to exchange BFUSD for a supported USD stablecoin.

This content is provided to you “as is” for general information and educational purposes only, without any representations or warranties of any kind. It should not be construed as financial advice or a recommendation to purchase any specific product or service. Digital asset prices may be volatile. The value of your investment may go down as well as up and you may not get back the amount you invested. You are solely responsible for your investment decisions and Binance is not responsible for any losses you may incur.

The products and services mentioned herein may be limited to certain jurisdictions or regions or to certain users due to applicable legal and regulatory requirements. These materials are intended only for those users who are authorized to access and receive the products and services mentioned and are not intended for restricted users. You are responsible for staying aware of and complying with any restrictions and/or requirements imposed on the access and use of any products and services offered or made available through Binance in each country or region from which you access them or on your device. on behalf of. Binance reserves the right to change, modify or impose further restrictions on access to and use of any products and/or services offered from time to time at its sole discretion at any time without notice.

This material should not be considered financial advice. For more information see our terms of Use, BFUSD Terms of Use and ours Risk Warning. To learn more about how to protect yourself, visit our Responsible trading page.