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Borrowing 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

  1. 1.
    Optimal Protocol Efficiency: This fee model ensures 100% efficiency for the protocol. The borrowing fees collected are directly added to the vault as negative Profit and Loss (PnL), contributing positively to the protocol's financial health.
  2. 2.
    Strengthened Vault Over-Collateralization: The structure of the borrowing fees bolsters the over-collateralization of the vault. This enhancement significantly increases the safety of the capital provided by liquidity providers.
  3. 3.
    Incentive-Based Exposure Control: The fee model employs a negative incentive to regulate net exposure. This encourages traders to either avoid or close positions that become excessively costly, thus promoting more prudent trading behavior.
  4. 4.
    Advanced Risk Management Strategies: By considering both individual trading pairs and groups of correlated assets, the borrowing fee framework effectively manages the platform’s overall risk exposure. This nuanced approach allows for more precise control over risk factors.
  5. 5.
    Maximized Revenue Opportunities: The model aligns the protocol’s fee structure to optimize revenue generation. This alignment leverages the scaling of open interests and trading volume, resulting in higher potential earnings for the protocol.
  6. 6.
    Enhanced Scaling Potential: With more robust management of price exposure risks, the protocol can safely allow higher maximum open interests on all pairs. This increase can be achieved without necessitating additional Total Value Locked (TVL) in the vault, thus facilitating better scaling.

Borrowing APR

The borrowing APR (Annual Percentage Rate) 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 for calculating Borrowing APR is:
BorrowingAPR=volFactorMaxVaultExposuremarketFactorBorrowing APR=\frac{volFactor}{MaxVaultExposure} *marketFactor
Where:
  • volFactor: This is the volatility coefficient. A higher volatility implies a more expensive borrowing rate.
  • Max vault exposure %: This parameter reflects the ideal maximum exposure of the vault. It is a predefined percentage.
  • marketFactor: This coefficient, ranging between 0 and 1, allows for adjustments in costs across different groups of trading pairs.

Pair Borrowing

Pair borrowing denotes the holding fee associated with each trading pair. This fee is computed by considering the net Open Interest (OI) and the Borrowing Annual Percentage Rate (APR) specific to a pair, in relation to the Total Value Locked (TVL) in the vault. The formula to calculate this is
PairBorrowingAPR=BorrowingAPRNetOIVaultTVLPairBorrowingAPR=BorrowingAPR*\frac{NetOI}{VaultTVL}
For instance:
  • Assume a Borrowing APR of 50%.
  • Consider a Net OI of $2 million.
  • Let the Vault TVL be $20 million.
Using these values, the Pair Borrowing APR would be calculated as:
PairBorrowingAPR=50%×(2M20M)=5%Pair Borrowing APR=50\%×(\frac{2M}{20M})=5\%
This calculation indicates that the Pair Borrowing APR for this specific trading pair is 5%.

Group Borrowing

Trading pairs with significant correlation are categorized into groups. For these groups, a collective borrowing fee, known as the 'Group Borrowing Fee APR,' is levied. This fee is computed using the same formula as for individual pair borrowing, but with a focus on the cumulative net Open Interest (OI) of all pairs within the group, the group's specific borrowing APR, and the Total Value Locked (TVL) in the vault. The formula is:
GroupBorrowingAPR=BorrowingAPRNetOIVaultTVLGroupBorrowingAPR=BorrowingAPR*\frac{NetOI}{VaultTVL}
Consider this example:
  • The Group Borrowing APR is 20%.
  • The Total Net OI across all pairs in the group is $6 million.
  • The Vault TVL is $20 million.
Applying these values to the formula, we get:
GroupBorrowingAPR=20%(6M20M)=6%GroupBorrowingAPR = 20\%*(\frac{6M}{20M})=6\%

Final Fee

The 'Final Borrowing Fee' that a user is required to pay at any given time is calculated based on the higher value between the 'Pair Borrowing Fee' and the 'Group Borrowing Fee.' This means that the user pays the maximum of these two rates.
It's essential to emphasize that each trading pair is uniquely assigned to only one group.
Last modified 2mo ago