Hello, everyone!
In this article we will describe the transition to the new funding model, how it will help make the liquidity provision more attractive, and why the changes will have a positive effect on the protocol as a whole.
Enjoy reading it!
What is Funding?
Funding is the periodic payments traders make to each other, used by perpetual futures exchanges.
The name "perpetual futures" implies that such contracts have no expiration date, so traders can hold positions opened indefinitely and the futures contract price of an asset may deviate from the price of an asset itself.
To minimize the deviation between prices, funding mechanism is implemented, which encourage traders to open counterpositions.
All traders pay or receive funding payments depending on the open interest in the market in which their position is open:
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If the perpetual futures price of an asset (Market Price) is higher than the price of this asset itself (Index Price), then the funding is positive for shorters and negative for longers. In this case, the total open interest of long positions exceeds the total open interest of short positions. Funding is paid by traders who opened long positions, and is credited to traders who opened short positions.
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If the perpetual futures price of an asset (Market Price) is lower than the price of this asset itself (Index Price), the funding is positive for longers and negative for shorters. In that case, the funding is paid by traders who opened short positions, and is credited to traders who opened long positions.
Funding on Tsunami Exchange
With the launch of Tsunami 1.0, funding payments were asymmetric and were calculated according to the formula:
Funding = |Market Price - Index Price| * Position size / 24
The asymmetry consisted in the fact that the receiving side was rewarded with an additional premium and received more for 1 token of open position than the opposite side paid for the same token:
Premium = |Market Price - Index Price| * Paying position size / Receiving position size
Why do we give up the asymmetric model?
In the first version of the protocol the counterposition existed only on the side of traders who paid each other. With the transition to the second version of the protocol, in addition to the funds of traders in the counterposition the main part is the funds by liquidity providers.
Because of this asymmetry in favor of traders, it was decided to change the funding model to a symmetric one in which excess funding previously sent to the receiving side is sent to the liquidity providers.
Symmetric funding is used by major perpetual future exchanges, and the implementation of this proposal is designed to make the liquidity provision more attractive.
What will be changed with the transition to Funding 2.0?
If the funding rate for the receiving side is the same as for the paying side, "excess" funding will be created.
Let's look at the example:
Long Open Interest: 100k XTN
Short Open Interest: 10k XTN
Long Funding Rate: 0.01%
Short Funding Rate: 0.1% → 0.01% (after changes)
So what's the difference?
On the previous version of funding, traders with long positions pay funding equal to 100k * 0.01% = 10 XTN, while traders with short positions get paid the same 10 XTN, which is 10 times asymmetric (because of only 10k in short).
However, with the transition to the new protocol, in addition to traders with short positions in the counterposition are also liquidity providers who do not receive funding.
With changes in the funding model, shorters will receive funding at the same rate as the counterparty (longers) pays. That is, according to our example, 1 XTN would be sent to shorters, and 9 XTN would be sent to liquidity providers as they provide their funds to the counterparty at 90k of open interest.
Growth
Along with the change in the funding model, we are approaching the models of the largest perpetual futures trading platforms. This change will help us stimulate liquidity provision and also make the user interface clearer by offering a single funding rate for long and short position holders.
Thank you for reading.
Always your Tsunami Team!