⚖️Funding & Interest Rate
Last updated
Last updated
In Perennial V2, the funding flows from longs to shorts (or vice versa), while being controlled with a P-controller over the skew in long vs short.
The is a measure of how imbalanced a given market is. The higher the skew the greater difference in positions from takers on the long & short sides of the market. Ideally, markets are perfectly balanced, this ensures maximum capital efficiency. However, in situations where there is an imbalance, makers will take on exposure to the lesser side of the market to ensure the larger side of the market is always backed.
In order to rebalance the market (reduce skew), a funding rate is utilized to incentivize market participants change their positions or enter new ones.
At each market update, the P-controller recalculates and updates the rate of change of the funding based on the skew and a risk parameter (k). The funding rate continues to virtually adjust linearly at its latest updated rate of change in between market updates.
If the market has a skew, then at each oracle update the P-controller will adjust the funding rate that each side will pay. If the skew is larger than the size of the funding change per update also increases.
The maker side has no ability to effect the pricing of the funding, aside from indirectly through limits on the magnitude of long and short.
These values here map to the follow outputs of the snapshot
In the event of skew, the maker side will supplement the lesser side of the market to ensure the larger side of the market is matches. In exchange, they receive pro-rata funding for the exposure it is covering. Intuitively, the maker side of the market is being compensated for taking whatever is currently the unfavourable side of the market pro-rata.
In this example, the skew of the market is (10 - 6) / 10 or 40%. This will cause the funding rate of the market to steadily increase until the skew changes. The maker side of the market is receiving 80% of the funding (per position) that the short side of the market is receiving for the exposure it is taking on.
In order to keep the maker side of the market incentivized even when we have relatively balanced long and shorts, markets can charge an interest rate. This is meant to measure the delta-neutral capital costs of the makers, whereas funding covers their net exposure.
The interest rate is determined by a utilization curve and is given to all maker positions. In order to cap the spread, if there is a greater amount of maker position than the sum of the long and short positions, the interest rate is pro-rata discounted. Utilization is determined by measuring the greater side against the sum of the maker and lesser side. Intuitively, the interest rate is a funding spread used to incentivize idle liquidity.
In this example, the utilization is 10 / (5 + 6) or 91%. Both longs and shorts pay their pro-rata portion of the overall market interest to the maker side of the market.
On market creation, the market operator selects a utilization function which defines the interest rate paid to makers at every level of utilization, allowing each market to have have a different delta-neutral cost of capital. Perennial uses Compound-style utilization curves that are algorithmic & continuous.
Jump-rate Curves
The search for a perfect curve is an ongoing battle, and these curves will need to be actively managed.
In JumpRate curves, the curve is parameterized to slowly increase in a linear fashion as utilization climbs to the target utilization at which it reaches its target rate. Then, beyond this target utilization, the rate increases rapidly to incentivize the market to rebalance back to the target utilization/rate.
In order to calculate the current interest rate, you can use the following equations.
The below values can be found in the market snapshot:
Combining the outputs of the two equations above, you're able to get the total rate plus any related fees:
