Funding

Overview

Vest uses a risk-based funding mechanism that responds faster and more accurately to market conditions than traditional exchanges.

While conventional funding rates only consider individual market imbalances, Vest evaluates how each market contributes to system-wide risk—leading to more stable and predictable funding rates for traders.

Funding rates are determined by the marginal risk each market adds to the entire system. Markets contributing more systemic risk will have proportionally higher funding rates.

For example, on a traditional exchange, BTC and ETH might have similar funding rates if they share long/short imbalances. On Vest, if BTC positions contribute more to system-wide risk, BTC will have a higher funding rate, regardless of similar imbalances. Within each market, all traders still pay or receive the same funding based on their position direction—longs pay shorts when the market is long-heavy, and vice versa.

Why this matters for trading

This risk-based funding system isn’t just a balancing mechanism—it’s a tool for market stability. By charging higher funding rates in markets that pose more systemic risk, Vest keeps funding more stable and predictable for traders across markets and market conditions on average. This means fewer surprises and a more efficient trading experience, especially if you have positions in multiple markets.

Technical details

Vest's funding achieves stability through:

1. Euler Allocation:

   1. Each market's funding rate equals its marginal risk contribution to system EVaR:

      1. $f_\rho^t(X^{(i)}) = \frac{\partial \rho(\sum u_i X^{(i)})}{\partial u_i}$

      2. $\rho$ is defined as EVaR of total portfolio

      3. $X^{(i)}$ is liability from market $i$

2. Time decay adjustment:

   1. Rates scale with the risk horizon $\tau$:

      1. $f_\rho^t = \frac{\partial \rho^{\text{Euler}}(X^{(i)}_{t+\tau})}{\partial \tau}$

3. zk-Verification:

   1. All inputs ($S_t$, $\Sigma_t$) and outputs ($f_\rho^t$) are proven correct via zkSNARKs.

Example funding calculations

Scenario:

• System EVaR ($\rho$) = $10M

• ETH contributes $1.5M to EVaR

• Time decay = 0.01/hr

• ETH market is 70% long

Calculation:

1. Marginal risk share:

   1. $\frac{1.5\text{M}}{10\text{M}} = 15\%$

2. Apply time decay:

   1. $0.15 \times 0.01/\text{hr} = 0.0015/\text{hr}$

3. Result:

   1. Longs pay shorts 0.15% hourly until positions rebalance.