Funding Rates
Funding rates act as a final controller to ensure our final objective
While the AMM addresses the marginal risk from the change in inventory using premium and rebate, there remain some residual risks, one of which is caused by the change in the price process of the underlying asset. To cover for such risk, we charge funding periodically.
Given
is a function of an
dimensional vector
, we need a way to define funding rate for each market such that the total funding accumulated across
markets add up to
. To achieve this, we use a risk attribution mechanism called Euler allocation.
Let
be the liability arising from
th market. Using Euler allocation, we calculate the amount of funding needed from
th market as
. Now, for each trader
with position size
where
, they are responsible for covering
For example, if the market is long-heavy (
), traders with long position
pays funding, while those with short position
receives funding. This way, the AMM accumulates
, which is precisely the amount of funding needed to satisfy the invariant
with high probability.
Last modified 3mo ago