💵ABR - Funding Rate

Technical Paper on our Funding Rate - Adaptive Balancing Rate ( ABR )

At ZKX, we introduced a new funding mechanism (aka Adaptive Balancing Rate - ABR) which takes into account the sudden price movements in the perpetual swap's price. This funding rate identifies jumps in the price and takes on the additional loading resulting from it. This way, unlike the generic funding rate mechanisms, the rate can represent and adapt to the volatility of the underlying asset.

Perps and Funding rate

Perpetuals function like spot trading instruments but are synthetic and allow leverage to trade and have no expiration date. Since they have no expiration date, the "funding rate" is introduced to tie the price of the perp close to the price of the underlying asset.

Perp price > Index Price = > Funding rate positive - Long pays short Perp price < Index Price = > Funding rate negative - Short pays long

If the majority of traders go short, the order book is unbalanced, and an incentive is required to restore balance in the order book on both sides. The trader's direction causes an imbalance in the depth of the market of the order book, and that's why incentives work to bring the perp price back in line with the spot price.

Breakdown of the ABR Mechanism

The premium in ABR is based on the volatility of the underlying asset, measured through Bollinger Bands. As volatility increases, additional risk is created when traders make more bets or leave the order book.

To balance this risk, a premium is added, but it is removed when volatility decreases and traders return to the order book. The difference between Bollinger Band Price and Mark Price is integrated and added to the funding premium through a logarithmic function.

The premium is calculated every hour using TWAP and a fixed interest rate is added to account for differences in interest rates between currencies. The funding rate is charged/paid to ZKX traders every 8 hours and is adjustable in the long run.

Click here to read the Technical Paper.