What is a Perpetual Swap?
A Perpetual Swap is similar to a spot trading instrument except that it is synthetic, meaning there is no physical exchange, and it allows you to have leverage. This leverage allows you to increase your gains, but can also lead to greater losses. A Perpetual Swap is also similar to a futures contract in that it can diverge from the spot price, largely due to the leverage used, but a Perpetual Swap does not expire.
Break It Down
A Perpetual Swap is a newer form of a futures contract with the key difference being that the Perpetual Swap does not have an expiry date. However to anchor Perpetual Swaps to the underlying spot rate, periodic payments known as ‘Funding’ are applied’. On Alpha5, this funding is tabulated every 8 hours, at which time funds are paid or collected by users that have an open position in the Perpetual Swap contract at that time.
None of these fees go to Alpha5, they are settled solely between traders who have an open position at the time of the funding snapshot.
The goal of the funding mechanism is to help the Perpetual Swap mimic the spot price (called the A5XBT index) as closely as possible. Continued periods of Perpetual Swap trading over the Index will lead to a higher funding rate where longs will pay shorts (who receive the funding payments mentioned above). Likewise, when the Perpetual Swap trades for a sustained period below the Index, longs will receive funding payments at the expense of shorts.
So, whereas you might engage in a futures contract settling on July 1, 2020 and expect the price of Bitcoin to be higher than it is today, instead you can opt for a Perpetual Swap and continue to trade it as a leveraged spot position, knowing that it’ll reflect a pretty good approximation to spot prices. Alpha5 also affords you the opportunity to leverage up to 25x, an amount Alpha5 feels is responsible, and reduces the chances of adverse outcomes in contrast to many other crypto derivatives exchanges.
The Funding Rate
On Alpha5, the funding rate formula is informed by the Premium Index and Interest Rate, which is calculated using this formula:
Premium Index [P] = ((Max (0, Bid Price — Mark Price) — Max (0, Mark Price — Ask Price))/Spot Price) + Funding Rate of Current Interval
And then it can be imported into the Funding Rate formula to complete the calculation:
Funding Rate [F] = Premium Index [P] + clamp(Interest Rate [I] - Premium Index [P], 0.10%, -0.10%)
Thus, if (I-P) is within +/- .10%, then F = P + (I-P) = I. If this is the case, F will be amplified.
- If -.03% < (I-P) < .03%, F will be multiplied by 2
- If -.06% ≤ (I-P) ≤-.03% or .03% ≤ (I-P) ≤ .06%, F will be multiplied by 1.5
- If -.10% ≤ (I-P) <-.06% or .06% < (I-P) ≤ .10%, F will be multiplied by 1.25
Funding Rate Cap: (Initial Margin - Maintenance Margin) * 25%
Amplifiers
Why will F be amplified?
As illustrated above, in a feature exclusive to Alpha5, when the Interest Rate - Premium Index is within +/- .10%, then the Funding Rate = Interest Rate.
When markets are calmer, and there is next to no premium, only the Interest Rate component applies. That means that a trader who is short the Perpetual Swap would stand to gain more in calmer markets because Alpha5 amplifies the Interest Rate depending on how much deviation there is within that 0.10% limiter.
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