Centralized–decentralized exchange funding rate arbitrage as a basis trade: risk decomposition, stress testing, and portfolio construction under venue uncertainty

Funding rate arbitrage between centralized and decentralized cryptocurrency exchanges is often described as a low-risk carry strategy, but this description is incomplete because the trade can fail through funding-spread compression, imperfect cross-venue hedging, execution frictions, forced liquidation, and settlement or smart-contract disruption. This paper asks how CEX-DEX funding rate arbitrage should be modelled as a basis trade, which risk channels dominate its performance, and how leverage and venue choice should be controlled under stress. Using Binance Futures funding rates for BTC, ETH, and SOL from January 2021 to December 2024 and synthetic DEX funding rates designed to isolate oracle lag, structural spread, and higher DEX-rate noise, the paper develops a covariance-aware five-component risk decomposition, a Brinson-style PnL attribution, a Cox survival model for liquidation risk, historical stress tests, CVaR portfolio optimization with venue haircuts, and Monte Carlo tail-risk analysis. A protocol-data robustness exercise using observed dYdX v4 funding rates over its available overlapping window distinguishes the framework’s controlled scenario results from evidence based on an operating DEX. The results show that net annualized returns are driven mainly by funding carry, but that these returns are highly assumption-sensitive and should not be interpreted as frictionless arbitrage profits. Funding and residual market risk account for the largest variance shares, leverage and volatility regime dominate liquidation hazard, and stress tests show that counterparty-risk episodes are more damaging than purely directional price crashes. The paper contributes a transparent framework for position sizing, leverage limits, and venue allocation in cross-venue crypto basis trades.