💸Funding Rate

How Funding Rates Work

Higher utilization of the liquidity pool for positions results in a less liquid Marginal market. This should decrease the profitability of arbitrage opportunities via Marginal replicated swaps and cause larger price deviations from the spot market.

To further incentivize price convergence, the Marginal pool charges a typical perpetual funding rate on outstanding positions.

Each trader's position debt changes based on the deviation in the time-weighted average of the Marginal pool price relative to the oracle price fetched from the associated Uniswap v3 spot market. Positions charged funding through debt increases are pushed closer to liquidation, incentivizing earlier settlement.

The debt the position owes (dxt , dyt ) becomes time dependent with funding.

At position open:

dx0 = dx

dy0 = dy

However, for the same leveraged long X relative to Y , the position Y token debt is altered based on the relative difference in Marginal time-weighted average price versus the Uniswap spot time-weighted average price:

dyt+τ = dyt °§ (Pt,t+τ / . Pt,t+τ )τ/T

This produces continuous, in-kind funding with period T an immutable on the pool. It has the effect of paying or receiving funding from the position’s profit or loss. The X token debt remains unchanged.