Funding

Funding is a mechanism in perpetual swaps that helps keep the price in the perpetual market close to the price in the underlying (spot) market. When the mark price exceeds the index price, longs pay shorts, and when the mark price is lower than the index price, shorts pay longs.

Please note that some perpetual markets on Butter.xyz do not have funding events, and Butter.xyz may enable or disable funding events on any market at any time.

Funding event frequency

For every market, funding events occur every hour.

Funding payments

The size of the funding payments is the funding rate times the notional size (ETH value).

Funding rates

The base funding rate $r$ is the 1-hour TWAP, evaluated every minute, of the premium of the mark price over the index price.

$r = \frac{1}{96} *\frac{TWAP_{mark - index}}{TWAP_{mark} }$

The funding rate for longs, $r_L$, can differ from the funding rate for shorts, $r_S$. The following table shows the funding rate calculation under different conditions.

Define $f_L$ as the fraction of open positions that are long, and $f_S$ as the fraction of open positions that are short. ($f_L + f_S = 1$)

vAMM skew	Mark-index premium	Funding rate
More longs than shorts ($f_L > f_S$)	Mark > index	$r_L =r\newline r_S = -r$
	Mark < index	$r_L = (0.15 + 1.7*f_S)* r \newline r_S = -(0.15 + 1.7*f_L) * r$
More shorts than longs ($f_S > f_L$)	Mark > index	$r_L = (0.15 + 1.7*f_S)* r \newline r_S = -(0.15 + 1.7*f_L) * r$
	Mark < index	$r_L =r\newline r_S = -r$

The purpose of asymmetric funding rates is to preserve the vAMM fee pool during periods that are unfavorable to the fee pool.

The minimum funding rate is 0.0001%; if the funding rate determined by the above formula is below the minimum funding rate, no funding payments will occur.

In addition, in cases where funding is paid from the fee pool, funding rates are capped to limit the cost to at most 10% of the fee pool.