Protocol Update: Introducing Interest Rate into Everlasting Options, Power Perps, and Gamma Swaps.
A couple of weeks ago, we made an update to Deri Protocol’s funding rate algorithm for perpetual futures to better align with the rates seen on major centralized exchanges (CEXs). This update created an inconsistency across the different derivative types available on Deri: while perpetual futures are based on a non-zero risk-free interest rate, the other three derivative types provided by Deri Protocol are assuming a zero interest rate. Hence we are bringing forward another update to the protocol so the funding fee mechanisms are consistent across all our derivative products.
What Was Changed
We have added an interest rate component as a baseline to the funding rate calculations of Everlasting Options, Power Perps, and Gamma Swaps. The BaselineDailyFundingRate has been set to 0.03%, consistent with that of the perpetual futures, as well as the rates adopted by leading futures exchanges such as Binance and BitMEX.
The New Funding Fee Algorithms
Everlasting Options
The update for the options algorithm is a bit complicated as the original pricing formula calculating the theoretical prices of everlasting options was based on zero risk-free interest rate. To make this upgrade, we re-derived the pricing formula for the everlasting option, incorporating a non-zero risk-free interest rate.
Please refer to this paper if you are interested in the details of the pricing.
Power Perps
The original paper already provided the formula with the interest rate so we simply changed that parameter’s value to 0.03% (daily).
Gamma Swap
Gamma Swap is a composite derivative consisting of power perps and perpetual futures. We simply updated the two parts just as how power perps and perpetual futures were handled, respectively.
Impact on Traders
Everlasting Options
The more in-the-money the option is, the more it is affected. That is, the puts with higher strikes and the calls with lower strikes are more affected. For out-of-money options (e.g. BTCUSD-100000-C), the difference is very small and negligible. The most affected ones are the deep in-the-money options. For example, a long position in BTCUSD-30000-C incurs an additional funding fee similar to that of perpetual futures. Conversely, a long position in BTCUSD-100000-P pays less in funding, with the difference approaching the funding rate of perpetual futures. This actually results in a negative funding rate for BTCUSD-100000-P. That is, a short position in BTCUSD-100000-P actually receives funding fees, which makes sense.
The PnL of a long position in BTCUSD-30000-C is almost linear (Delta ≅1), making it closely resemble a long futures position. On the other hand, a long position in BTCUSD-100000-P (Delta ≅-1) behaves almost like a short futures position. It would actually be inconsistent if this were not the case, as an arbitrage opportunity would arise if the funding fee for BTCUSD-30000-C did not align closely with that of long BTCUSD futures or if the funding for BTCUSD-100000-P did not align with short BTCUSD futures.
Power Perps
Long positions pay more funding fees and, accordingly, short positions receive more.
Gamma Swap
For the gamma swap position still around its entry price the impact is negligible, as the impact on the power part and that on the futures part cancel each other out.
About Deri Protocol
Deri, your option, your future!
Deri is the DeFi way to trade derivatives: to hedge, to speculate, to arbitrage, all on chain. With Deri Protocol, trades are executed under AMM paradigm and positions are tokenized as NFTs, highly composable with other DeFi projects. Having provided an on-chain mechanism to exchange risk exposures precisely and capital-efficiently, Deri Protocol has minted one of the most important blocks of the DeFi infrastructure.
