Funding Rate Risk

The native yield of OPB is generated by a positive funding rate incurred by the short position backing the perpetual bond. While on average the funding rate is positive (yield generating), it is possible that at times, typically during bear markets, the funding rate can go negative. This means that the position held by OpenDelta incurs a cost. This will deteriorate the collateral of the OPB hedged position and cause a loss in value.

Mitigation

We mitigate this risk by having an insurance fund that kicks in every time negative funding has to be paid. Using historical funding data as well as forward looking analysis, we have determined a safe initial size of the insurance fund that makes the risk of depletion due to negative funding unlikely. In addition, the insurance fund will grow over time as a fraction of the positive funding is fed into the insurance fund. We will adjust this fraction according to market conditions.