KRAV v1.0 — Introducing KRAV’s Dynamic Price Impact and Funding Rate

We are thrilled to announce the launch of KRAV v1.0, designed to offer a seamless trading experience for traders and an efficient permissionless listing system for liquidity providers. A central aspect of KRAV’s V1 mechanism is its unique and improved risk mechanisms, designed to maintain liquidity pool health and ensure fair trading conditions. In this article, we will delve into two critical components of KRAV: the price impact and the funding rate mechanisms.

Existing Price Impact Mechanisms

Unlike traditional perpetual exchanges, KRAV revolutionizes perpetual futures markets by accepting any altcoin collateral, with liquidity pools at any size. In order to balance risk KRAV has developed unique dynamic risk mechanisms. Many decentralized perpetual exchanges have implemented price impact mechanisms, but these often fall short in several key areas. Traditional price impact models are typically less dynamic, heavily relying on deep liquidity to function properly, and often resulting in unfavorable trading conditions for traders. They usually fail to adapt to varying liquidity pool sizes and do not adequately incentivize balanced trading.

Problems with Existing Mechanisms

• Static Adjustments: Traditional price impact models employ static adjustments that do not account for the real-time state of the liquidity pool. This inflexibility leads to inefficiencies, especially in pools with fluctuating liquidity levels.
• Deep Liquidity Dependency: Many exchanges require substantial liquidity to maintain functionality. Without deep liquidity, these mechanisms can lead to significant slippage and adverse trading conditions.
• Unfavorable Trading Conditions: Existing models often penalize traders excessively for placing large orders or trading in imbalanced markets, leading to less favorable entry prices.

KRAV, as the pioneer quanto perpetuals exchange allowing permissionless listing of altcoins to create liquidity pools, addresses these limitations with a dynamic price impact mechanism. Our approach minimizes risk to liquidity pools, allowing trading to occur in liquidity pools regardless of their size.

Introducing KRAV’s Price Impact Mechanism

The price impact mechanism employed by KRAV is essential in maintaining equilibrium within our liquidity pools. It dynamically adjusts an individual trade’s open price based on the existing imbalance between long and short positions. This adjustment, known as price impact, acts as a premium and is only incurred when a trade exacerbates the imbalance between longs and shorts. This approach mitigates net PnL impacts on the pool and incentivizes traders to help balance the pools.

Unlike traditional perpetual decentralized exchanges that offer deep liquidity for a small basket of tokens, KRAV features a wide array of individual token liquidity pools through permissionless listing. Therefore, our price impact factor is adjusted dynamically to mitigate the risk to these pools without penalizing traders excessively. The price impact takes into account the size of the trade, the liquidity pool size, and the long/short balance.

How Price Impact Works

• When opening a position, the entry price may be affected by price impact. If your position helps balance the long/short ratio of the underlying collateral pool, you will experience zero price impact.
• If your position imbalances the long/short ratio, your trade will incur a price impact, resulting in a less favorable entry price. Depending on your trade position (long or short), your entry price may be adjusted higher or lower.
• In the event of a crossover, where your trade shifts the dominant open interest, the price impact is calculated based on the amount that crosses over. The remaining portion of the trade is settled with zero price impact. Specific price impact values can be viewed on the interface before executing a trade.

Calculation

Price Impact (%) = base impact factor * (multiplier ^ impact exponent) * (absolute difference in OI after trade — absolute difference in OI before trade) / trade size * 100

The dynamic multiplier adjusts the price impact based on the liquidity pool size and the long/short balance to maintain health of liquidity pools. Furthermore, the base price impact factor is adjusted to ensure a good trading experience for all traders.

KRAV’s Funding Rate Mechanism

In addition to the price impact, KRAV implements a funding rate as a capital-efficient mechanism to manage the risk of live trades and limit drawdown risk during volatile market movements. Similar to traditional funding rates, KRAV’s funding rate aims to minimize liquidity gaps between open long and short trades over time, preventing significant one-sided exposure on any trading pair.

How Funding Rate Works:

• While a position is open, you may incur positive or negative funding fees in altcoin units, depending on your trade position.
• Funding rate is calculated based on the difference in total open interest between long and short positions.
• The side with the dominant open interest pays funding fees at periodic intervals to the opposite side, with individual payouts proportional to the position size.
• Funding rates directly impact your net PnL calculations, meaning that your liquidation price may change.

Calculation

To ensure fair and dynamic adjustments of funding rates based on market conditions, KRAV employs a funding fee per block percentage which is applied to the net exposure of a trading pair. This calculation ensures that funding fees accurately reflect the changing dynamics of open interest in both long and short positions.

The net exposure of a pair will likely change while your trade is open. To account for this, KRAV tracks accumulated funding fee per open interest for both long and short positions. The calculations are as follows:

For longs: Accumulated funding fee per open interest += (long open interest — short open interest) * blocks elapsed * funding fee per block % / long open interest.

For shorts: Accumulated funding fee per open interest += (short open interest — long open interest) * blocks elapsed * funding fee per block % / short open interest.

These values are updated every time the open interest changes, including when a trade is opened or closed.

When you open a trade, the initial accumulated funding fee value is recorded. As market conditions change and the open interest updates, the current accumulated funding fee value changes, affecting your net PnL and liquidation price. To determine how much your trade should pay or receive in funding fees, the following calculation is used:

Funding fees = (current accumulated funding fee per open interest — initial accumulated funding fee per open interest) * collateral * leverage

If the funding fees value is negative, it is added to the trade value, pushing the liquidation price further away.

If the funding fee value is positive, it is subtracted from the trade value, bringing the liquidation price closer.

This mechanism ensures that funding fees are dynamically adjusted to reflect the ongoing market conditions, incentivizing balanced positions and promoting liquidity pool health. By tracking and updating accumulated funding fees, KRAV provides a transparent and efficient way to manage funding rates, benefiting both traders and liquidity providers.

Thank you for reading!

We invite you to join us in this exciting journey as we continue to innovate and enhance the decentralized trading experience. Stay tuned for more updates and features as we evolve KRAV to meet the needs of our growing community.

Start trading on KRAV today and unleash the utility of your altcoins with leveraged perpetual futures trading!