V2 Funding Fee on Substance Exchange

SubstanceX has introduced a new funding fee system today, presenting an innovative design to achieve a better balance of interests among long position holders, short position holders, and liquidity providers (LPs), resulting in a more reasonable and stable operation of the market.

Before redesigning the funding fee, SubstanceX listened attentively to the demands of various platform users:

1. Liquidity Providers (LPs): LPs typically invest significant amounts of capital and prefer lower risks. They expect to gain stable returns when risks are manageable. However, as the trader’s naked position becomes larger, LPs face increased risks. Therefore, they need to ensure that they receive corresponding compensation for taking on additional risks.
2. Directional Traders (Holding Large Positions): These traders aim to maintain reasonable holding costs, especially when holding smaller positions or lower naked positions.
3. Counter-Trend Traders or Arbitrageurs (Holding Smaller Positions): The opening behavior of counter-trend traders or arbitrageurs can hedge against directional traders, reducing the risk exposure of LPs. As they contribute to lowering LP risks, it is reasonable for them to receive certain compensation.

Based on these needs, our funding fee design starts from the holding costs of large position holders, considering their opening volume relative to the leverage ratio of available LP funds as a standard for assessing the risk LPs bear. The higher the risk LPs face, the higher the fee they will be charged. We will allocate fees from large position holders to LPs and small position holders in proportion to the naked and small position holders. Meanwhile, small position holders need to calculate fees based on their opening volume relative to the leverage ratio of LP funds and transfer these fees entirely to large position holders.

Through this design, we achieve several goals:

• LPs receive higher fee compensation when facing greater risks.
• When LPs face lower risks, directional traders pay lower fees.
• Directional traders enjoy reasonable holding costs.
• Small position holders can continue to receive income, and traders who entered the market earlier will have a higher marginal return.

Formula

1. The funding fee rate that long and short position holders are required to pay (Daily):
   LongPayfeerate = BaseRate + LinearRate * LongOI / (Total Liquidity * maxLiquidityLockRatio)
   ShortPayfeerate = BaseRate + LinearRate * ShortOI / (Total Liquidity * maxLiquidityLockRatio)
   The maxLiquidityLockRatio may be different for each trading pair. Please refer to Perpetual Specifications.
2. LP’s risk compensation received from the funding fee paid by long positions (Daily):
   LP_fee = LongOI * LongPayfeerate * (LongOI — ShortOI) / LongOI
3. Actual funding fee paid by long positions / short positions (Daily):
   Long_fee = ShortOI * ShortPayfeerate — LongOI * LongPayfeerate
   Short _fee = LongPayfeerate * ShortOI — ShortPayfeerate * ShortOI
4. Actual funding fee rate for Long / Short (Daily):
   Funding Rate L = Long_fee / LongOI
   Funding Rate S = Short_fee / ShortOI

Comparison of V1 Funding Fee and V2 Funding Fees

Visual Page Display

Numerical Calculation Comparison

Comparison of SubstanceX V2 Funding Fee with Other DEXs’ Funding Fees

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