Maximum Funding Velocity
This section explains how the maximum funding velocity parameter is calibrated.
Parameter Calibration Rationale
Under a critical skew level (near the maximum), and given an extreme price change of the underlying asset over a certain horizon (i.e., a strong upward or downward price trend in the direction of the skew), the funding rate velocity must ensure that the accumulated funding payment exceeds or equals the profit from the price change (i.e., the market risk delta is hedged by the funding payment). This incentivizes users to close their positions and return the market to a neutral state, even without intervention from other participants.
Given the use of soft maxSkew restrictions, the theoretical maximum skew is equivalent to maxOI. Therefore, maxOI is used in maxFundingVelocityCalibration instead of maxSkew.
Throughout the considered period, the skew measured in tokens is assumed to remain constant. This represents a highly conservative assumption, positing the absence of arbitrageurs who might respond to increased funding rates.
Key Parameters
is a risk horizon
is the extreme price change within the risk horizon that is highly probable, determined by the underlying asset's quality category:
Very Good
5%
Good
10%
Medium
15%
Bad
40%
Very Bad
40%
Estimated figures in the table represent the median historical 95% CVaR for price returns within each specified quality category.
is the proportional skew level (). Given a low skew, the protocol's risk exposure from unrealized PnL is minimal, which justifies setting the critical threshold at 95%.
is the frequency of the funding rate update, .
Calculation
where
is the maximum token-denominated skew determined under the oracle price at the moment of calibration.
The formal proof for the above formula is provided in the Appendix.
Input Data
Price of the underlying asset over the historical period
Coingecko
Frequency: 1h Period: past 365 days
Simple percentage return is calculated over the risk horizon
Maximum dollar OI per market
RF
-
-
Skew scale parameter
RF
-
-
Proof of MaxFundingVelocity Formula
Appendix B. Proof for the maxFundingVelocity formula
Results below are derived for long positions, for short positions the calculation is similar.
PnL from the price change at the end of the horizon is the following:
where is the percentage price return over the horizon.
Funding accrued per each period between the skew-modification events is calculated as follows:
where is the time step measured in days.
Accumulated funding at the end of the horizon:
Assuming a linear price growth, we have:
Then
The funding rate dynamics is the following:
where is the short notation for .
Let , , . At any given moment, the funding rate is defined as follows:
By integrating the funding rate's behavior into the funding accumulation equation, the following is derived:
The sum can be represented as follows:
where
The cumulative funding is then expressed as:
By the end of the defined period, the total accumulated funding must be at least equal to the profit or loss that has not yet been realized due to price fluctuations:
Let's find the minimum at which this inequality satisfies:
This gives the final equation for maxFundingVelocity:
The final outcome is achieved by solving the equation for .
This completes the proof.
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