Technical Details
Last updated
Last updated
Premium/Discount Mechanism
The funding system on Synthetix Exchange incorporates a layered approach to risk management by integrating a skew-dependent premium or discount into the quoted market prices. When a market has a long skew, a premium is applied, while a short skew results in a discount. This mechanism achieves two key objectives:
Rebalancing Incentives: Premiums collected from takers who expand the skew are redistributed to makers who compress the skew, incentivizing frequent rebalancing.
Soft Exposure Limits: By simulating price impact, the system imposes soft limits on the maximum exposure held by the debt pool without requiring explicit open interest caps.
This dynamic pricing approach supports a wide range of assets with varying liquidity profiles while protecting liquidity providers (LPs) from market manipulation.
Funding Rate Velocity
The funding rate velocity model introduces a continuous adjustment mechanism that improves price discovery and smooths funding rate trajectories. In this model, instead of the funding rate being directly proportional to skew (r = c * skew), the rate changes over time according to the formula dr/dt = c * skew.
This adjustment creates several advantages:
Dynamic Adjustments: Funding rates drift higher or lower in the presence of sustained position imbalances, allowing natural price discovery.
Smoother Trajectories: The rate changes gradually, reducing abrupt shifts and volatility in funding rates.
Net Neutral Funding for LPs: Over time, LPs neither earn nor lose funding. Funding flows through LPs with zero net impact, as periods of positive funding (e.g., long skew) are offset by equal and opposite funding in other periods (e.g., short skew).
See plots below illustrating debt pool earning funding when dr/dt > 0 while paying equal and opposite funding when dr/dt < 0
Hybrid Oracle Architecture
The hybrid oracle approach introduces multiple execution tiers to enhance performance, composability, and cost efficiency:
On-Chain Oracle Execution: Traditional execution relying entirely on on-chain oracle data, offering maximum composability.
Asynchronous On-Chain Execution: Delays execution slightly but relies on the same secure on-chain oracle data, balancing cost and composability.
Asynchronous Off-Chain Execution: Uses off-chain oracle networks for faster price updates, with data validity verified on-chain, offering superior execution efficiency.
This approach reduces on-chain costs by limiting oracle updates to actual trade executions, improving the cost-effectiveness and sustainability of the system while maintaining robust security and performance.
Additional Technical Details
For a deeper dive into the architecture and implementation, refer to SIP-279. This document outlines the complete specifications, including mathematical models and illustrative plots that demonstrate the system's impact on LP earnings and funding flows.
