Funding rates are a crucial mechanism for perpetual contracts, ensuring that the contract price tracks the underlying spot price. On Omni, funding rates play an even more significant role due to the design challenges of supporting such a wide variety of different markets. This article discusses how Omni’s dynamic funding rates work, and why they are needed.
Funding rates are periodic payments exchanged between holders of long and short positions, designed to anchor the perp price to the underlying spot price of the asset. Generally, when the perp price is trading at a premium to the spot price, long traders pay short traders, and vice versa. Funding payments incentivizes traders to take positions that bring the perp price closer to the spot price, keeping the perp market efficient.
Unlike most funding rate models, which rely on the price difference between the perp price and the index price (as seen on exchanges like Binance, Bybit, and Hyperliquid), Omni's model is primarily driven by the open interest (OI) imbalance, or the difference between long open interest and short open interest. While some other platforms like Kwenta have also explored OI-based funding rates, Omni's implementation features unique design choices tailored to facilitate the listing of long-tail assets.
Omni employs a unique funding rate model that adjusts based on several factors, including:
Open Interest (OI) Imbalance: The difference in open interest between long and short positions is a key driver of funding rates. Because Variational supports many illiquid assets which are traded infrequently, the open interest imbalance is a more robust metric that encourages a balance of longs and shorts on the platform.
Asset Size and Risk Exposure: The size of the asset and the Omni Liquidity Provider’s (OLP's) associated risk exposure also influence the funding rate. For smaller assets or those with less liquidity, the funding rate may be more aggressive to ensure that OLP can effectively manage its risk.
Market Conditions: Omni's funding rates can also reflect the volatility of the underlying asset.
In short, Omni sets parameters for how funding rates should be calculated (based on asset size, risk exposure, volatility, and other market conditions), while the OI imbalance is used as inputs for those calculations.
Dynamic funding rates help OLP manage risk, especially for long-tail, high-risk assets that may have lower liquidity or higher volatility. By responding quickly and aggressively to OI imbalance, funding rates can rapidly incentivize traders to take positions that offset imbalances, helping to net out risk for OLP. This is particularly important for long-tail assets, as they can be more expensive or difficult for OLP to hedge externally.
The math behind funding rate calculations and a full breakdown of their implementation can be found in the Variational docs.
Omni's dynamic funding rates have direct and tangible benefits for traders. By minimizing OLP's hedging costs by limiting the amount of external hedging required, these rates contribute to tighter spreads across all listed markets.
In addition, the rapid adjustment of funding rates to OI imbalance ensures that markets remain largely efficient and responsive, minimizing price discrepancies and remaining closely linked to underlying asset values. Omni’s funding rate model also creates unique opportunities for traders to capitalize on arbitrage or receive substantial funding payments, particularly when significant OI imbalances emerge on long-tail or exotic assets.
Omni's funding rates are more than just a mechanism for anchoring perp prices to underlying spot prices–they are used as a tool for incentivizing users to reduce OLP’s risk, particularly on long-tail assets that may be more susceptible to volatility and illiquidity. Dynamic funding rates help OLP minimize its exposure and reduce the need for external hedging, which cheapens hedging costs and allows OLP to offer tighter spreads. Omni’s unique approach to funding rates is one of the key differences between Omni and other platforms that allow for the listing of a wide set of markets, including many not available on any other exchanges.
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Funding rates are a crucial mechanism for perpetual contracts, ensuring that the contract price tracks the underlying spot price. On Omni, funding rates play an even more significant role due to the design challenges of supporting such a wide variety of different markets. This article discusses how Omni’s dynamic funding rates work, and why they are needed.
Funding rates are periodic payments exchanged between holders of long and short positions, designed to anchor the perp price to the underlying spot price of the asset. Generally, when the perp price is trading at a premium to the spot price, long traders pay short traders, and vice versa. Funding payments incentivizes traders to take positions that bring the perp price closer to the spot price, keeping the perp market efficient.
Unlike most funding rate models, which rely on the price difference between the perp price and the index price (as seen on exchanges like Binance, Bybit, and Hyperliquid), Omni's model is primarily driven by the open interest (OI) imbalance, or the difference between long open interest and short open interest. While some other platforms like Kwenta have also explored OI-based funding rates, Omni's implementation features unique design choices tailored to facilitate the listing of long-tail assets.
Omni employs a unique funding rate model that adjusts based on several factors, including:
Open Interest (OI) Imbalance: The difference in open interest between long and short positions is a key driver of funding rates. Because Variational supports many illiquid assets which are traded infrequently, the open interest imbalance is a more robust metric that encourages a balance of longs and shorts on the platform.
Asset Size and Risk Exposure: The size of the asset and the Omni Liquidity Provider’s (OLP's) associated risk exposure also influence the funding rate. For smaller assets or those with less liquidity, the funding rate may be more aggressive to ensure that OLP can effectively manage its risk.
Market Conditions: Omni's funding rates can also reflect the volatility of the underlying asset.
In short, Omni sets parameters for how funding rates should be calculated (based on asset size, risk exposure, volatility, and other market conditions), while the OI imbalance is used as inputs for those calculations.
Dynamic funding rates help OLP manage risk, especially for long-tail, high-risk assets that may have lower liquidity or higher volatility. By responding quickly and aggressively to OI imbalance, funding rates can rapidly incentivize traders to take positions that offset imbalances, helping to net out risk for OLP. This is particularly important for long-tail assets, as they can be more expensive or difficult for OLP to hedge externally.
The math behind funding rate calculations and a full breakdown of their implementation can be found in the Variational docs.
Omni's dynamic funding rates have direct and tangible benefits for traders. By minimizing OLP's hedging costs by limiting the amount of external hedging required, these rates contribute to tighter spreads across all listed markets.
In addition, the rapid adjustment of funding rates to OI imbalance ensures that markets remain largely efficient and responsive, minimizing price discrepancies and remaining closely linked to underlying asset values. Omni’s funding rate model also creates unique opportunities for traders to capitalize on arbitrage or receive substantial funding payments, particularly when significant OI imbalances emerge on long-tail or exotic assets.
Omni's funding rates are more than just a mechanism for anchoring perp prices to underlying spot prices–they are used as a tool for incentivizing users to reduce OLP’s risk, particularly on long-tail assets that may be more susceptible to volatility and illiquidity. Dynamic funding rates help OLP minimize its exposure and reduce the need for external hedging, which cheapens hedging costs and allows OLP to offer tighter spreads. Omni’s unique approach to funding rates is one of the key differences between Omni and other platforms that allow for the listing of a wide set of markets, including many not available on any other exchanges.
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