Yield Mechanism

Where does Perpetual Bonds yield come from?

As outlined in the previous section, a perpetual bond is tokenized debt issued against a 1x short position in a BTC/USD inversely priced perpetual swap (IPPS). One unique feature of perpetual swaps is that they do not have an expiry date. However, in order to keep the price of an IPPS in line with the underlying asset (in this case the BTC/USD spot price), they utilize something called funding.

What is funding?

Funding is a periodically occurring event where traders pay each other the funding rate. The funding rate can either be positive or negative depending whether the perpetual is trading above or below the underlying index price. The funding rate can be thought of as a penalty of being on the wrong side of the market. If the perpetual is trading above the spot price then the funding rate is likely positive. When the funding event occurs trades holding long positions have to pay traders that are short. This mechanism is designed to incentives traders to push the perpetual price closer to the index price. The size of the funding payment every trader has to pay is equal to

where n is the amount of perpetuals held by the trader, v is the value of the perpetual and r is the funding rate.

Short Funding Rate as a Yield Mechanism

Since a perpetual bond is tokenized debt issued against a short position, a positive funding rate implies that the the positions earn this funding rate.

When this rate is positive, OpenDelta collects yield on all of its held positions. Part of the funding rate is passed along to holders of OPB, part is used to capitalize the insurance fund, and a portion is collected by OpenDelta as a fee. To understand more about why an insurance fund exists, please see this section.

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