Funding Rates on SparkDEX Eternal

Overview

Funding rates on SparkDEX Eternal are designed to maintain market balance between long and short positions. These rates are calculated hourly for each market and collateral type, ensuring that market conditions are dynamically reflected in real-time. By adjusting funding rates based on the open interest imbalance between longs and shorts, the platform incentivizes equilibrium while preventing significant market distortions.

How Funding Rates Work

The funding rate mechanism ensures that traders with positions on one side of the market (long or short) pay or receive funding based on the market’s long-to-short ratio:

• Long-heavy Market: When the total open interest of long positions exceeds that of short positions, traders holding long positions pay funding to those holding short positions.

• Short-heavy Market: Conversely, if the total open interest of short positions exceeds that of long positions, traders holding short positions pay funding to those holding long positions.

Funding rates are asset-based and calculated on an hourly basis to reflect real-time market conditions. The adjustments ensure that the market remains fair and balanced, providing incentives for traders to counteract large imbalances.

Adaptive Funding Rates

SparkDEX Eternal uses an adaptive funding rate model that gradually adjusts over time based on the open interest ratio of longs to shorts. This model helps stabilize the market by encouraging traders to correct imbalances through their trading actions.

Mechanism of Adjustment

1. Imbalance Scenario:

   • If the open interest for longs significantly exceeds that of shorts, the funding rate paid by longs to shorts will increase incrementally. This continues until the open interest imbalance is reduced below a predetermined threshold or until an upper limit for the funding rate is reached.

   • Similarly, if shorts exceed longs, the funding rate paid by shorts to longs will increase incrementally.

2. Correction Scenario:

   • If traders close long positions or open more short positions, thereby reducing the imbalance, the funding rate adjusts downward gradually.

   • If the market flips and shorts now exceed longs, the funding rate shifts direction, and shorts will pay an incrementally increasing rate to longs.

3. Steady State:

   • Once the difference between long and short open interest falls below the threshold, the funding rate stabilizes. At this point, the funding rate reflects the near-equal balance between longs and shorts.

Key Benefits

• Real-time Adjustment: The adaptive funding model ensures funding rates always reflect current market conditions.

• Market Stability: By incentivizing equilibrium, the model helps maintain a balanced market.

• Fairness: Traders are rewarded or penalized based on the position imbalances they contribute to, promoting responsible trading behavior