āļøBorrowing Fee
Understanding Borrowing Fees
Borrowing fees apply to positions with the highest open interest in a trading pair. For instance, consider a scenario where there is $10 million in long open interest and $5 million in short open interest. In such a case, only the long positions are subject to borrowing fees, while the short positions incur no fees.
Advantages
Improved Protocol Efficiency: This fee model guarantees 100% efficiency by adding borrowing fees directly to the vault's PnL, enhancing the protocol's financial health.
Stronger Vault Security: Borrowing fees reinforce vault over-collateralization, boosting safety for liquidity providers' capital.
Incentivized Exposure Management: The fee model discourages excessive exposure by imposing negative incentives, promoting cautious trading behavior.
Advanced Risk Management: By analyzing individual pairs and correlated assets, the fee framework effectively mitigates overall platform risk.
Increased Revenue Potential: Aligning fee structures optimizes revenue by leveraging open interests and trading volume scaling.
Enhanced Scaling: Better management of price exposure risks enables higher maximum open interests without increasing TVL, facilitating smoother scaling.
Borrowing Fee APR
The Borrowing Fee APR is calculated to determine the fee for borrowing in a specific trading pair or a correlated group of pairs, assuming the vault is utilized to its maximum capacity. The formula is:
Where:
Volatility Factor: This is the volatility coefficient. A higher volatility implies a more expensive borrowing rate.
Max Vault Exposure (%): This index reflects the system's asset resilience, indicating the amount of assets available to cover traders' profits. If this value is low, Borrowing Fee APR tends to be higher, and vice versa.
Market Factor: Within a group, this index is determined by looking at how the volatility of pairs within that group is correlated. It helps reduce the Borrowing Fee APR at the group level, enabling more trading activities within popular or divergent groups, ultimately fostering increased trading efficiency.
If pairs are more similar, the index is higher, and vice versa.
The index for a pair always remains at 1.
From the Borrowing Fee APR, the Borrowing Fee Per Hour (%) can be computed by taking into account the Net OI and Max OI of an asset pair/group.
The Hourly Borrowing Fee that has to be paid per hour can be calculated as follows:
Pair Borrowing Fee
The borrowing fee is only charged on the dominant side of an asset pair. For example, if the total OI (Long) of BTC/USD is higher than that of Short positions, traders that placed Long orders have to cover the borrowing fees.
Group Borrowing Fee
It's essential to emphasize that each trading pair is uniquely assigned to only one group.
We categorize asset pairs into groups:
Group 1 (BTC, ETH)
Group 2 (EGLD)
Group 3 (SOL)
The Net OI across all asset pairs is used to determine which side (Long or Short) incurs the borrowing fees. The logic is similar to Pair Borrowing fee
Final Borrowing Fee
The final borrowing fee paid by the user at any point in time is determined by the maximum of the pair borrowing fee and the group borrowing fee.
For example, consider these statistics:
Pair Borrowing Fee has to be paid by traders taking Long positions (because the Long OI is higher for BTC/USD pair)
Group Borrowing Fee, however, has to be paid by traders taking Short positions (because the Net OI shows that there are more Short OI than Long OI in group 1)
All in all, both sides (Long and Short) have to pay for borrowing fees in this case.
The borrowing fee accrues each time a block is processed. Consequently, if you're incurring a borrowing fee, the longer your order remains active, the greater the accumulated fee becomes. Please pay attention to the Hourly Borrowing APR on the trading interface and adjust your strategy to avoid exorbitant borrowing fees.
Last updated
