Comment on page
Streaming Funding Fee
Aark's approach to balancing Mark Price and Open Interests.
The Streaming Funding Fee in Aark's trading platform is a balancing mechanism for traders and Liquidity Providers (LPs) and even has implications for Market Makers. It is crucial for anyone participating in the market to understand how it operates and how it impacts their activities.
Traders holding perpetual swap positions are subject to continuous funding fees, which are determined by the market's skew toward long or short positions. For example, if the market is skewed toward long positions, those holding long positions will pay funding fees to those with short positions. This creates a financial incentive for traders to take positions that balance the market, making it more stable and efficient for everyone involved.
The hourly funding rate is based on a premium, which indicates market skewness toward long or short positions and includes an "amplifier" factor that adjusts for liquidity pool risk. This fee is updated continuously and paid every block to balance the market.
From the LP's perspective, continuous funding fees help maintain a balanced long/short open interest (OI), reducing delta exposure and ensuring stable APRs for the LP pool. This also helps control the LP pool's leverage near a certain level, making it more predictable and less risky for LPs. Market Makers benefit indirectly from this mechanism, as it fosters market stability.
Suppose Alice holds a long position in an ETH contract, and most of the market is also skewed toward long positions. She will be paying a continuous funding fee to those holding short positions. This fee is not just a cost; it's a signal. It indicates that if Alice switches to a short position, she could earn funding fees rather than pay them, thereby incentivizing her to balance the market.
By incorporating the premium and the amplifier into the funding rate, Aark's Streaming Funding Fee mechanism ensures that the market remains balanced and that all participants can strategize more effectively. It's a vital cog in Aark's complex financial wheel, serving traders, LPs, and Market Makers alike.
Continuous imposition of funding fees helps maintain a balanced ratio of long/short OI by incentivizing traders to open positions in the opposite direction of the skewed positions. This balanced OI reduces delta exposures and ensures stable APRs for the liquidity pool while controlling liquidity pool leverage near a certain level.