0️⃣Zero Funding Rate

Strategic Implications and Benefits

Why zero funding rate?

For traders: the zero funding rate policy means that the cost of entry and exit is primarily transactional (e.g., gas fees and trading fees), without the added layer of funding rate expenses. This environment is particularly beneficial for those engaging in arbitrage, as it increases the potential profit margin of arbitrage trades.

For LPs: As arbitrage traders take advantage of the zero funding rate to correct price discrepancies, their actions help balance the overall market position, aligning with the LPs' interest in minimizing delta exposure. Additionally, the zero funding rate mechanism will incentivise more trading/arbitraging activities, resulting in higher protocol fees for LPs, further incentivising liquidity provision. Also, the profit made by the vDEX arbitrage bot will go to LPs directly.

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Introduction

vDEX adopts a unique approach in the DeFi landscape of perpetual futures markets by setting the funding rate to zero. This strategic decision is instrumental in shaping the trading dynamics and liquidity provision on the platform, especially for LP-Delta-Neutral Perpetual Futures. Below, we delve into the rationale behind this policy, its implications for traders and liquidity providers (LPs), and the overarching benefits it brings to the DeFi derivatives trading ecosystem.

Rationale Behind Zero Funding Rate

The funding rate in perpetual futures contracts is a mechanism designed to keep the market price of a perpetual contract (perps) in line with the underlying spot price. Traditionally, it acts as a periodic payment exchanged between long and short position holders, depending on the divergence between the perpetual contract price and the spot price. By setting this rate to zero, vDEX fundamentally alters the perps pricing mechanism to better suit the DeFi environment :

1. LPs Should Be Rewarded: LPs, as market makers to accommodate trader’s directional bets, should be rewarded, not punished in any way; with vDEX's DN perps pricing mechanism, LPs can be rewarded by increased trading volume and directly by arbitrage profits.

2. Encouragement of Arbitrage Trading: A zero funding rate removes the cost barrier for traders looking to exploit discrepancies between the mark price on vDEX and spot prices on external markets. This policy encourages a higher volume of arbitrage trades, which in turn enhances market efficiency and liquidity.

3. Attraction of Volume: Traders often look for platforms that minimize costs and maximize potential returns. By eliminating funding rates, vDEX becomes an attractive venue for high-frequency traders and arbitrageurs, thereby boosting trading volume.

4. Simplification of Trading Strategy: Traders no longer need to factor in the cost of holding positions over time due to funding rates, simplifying trading strategies, especially for those employing long-term or high-frequency arbitrage strategies.