Understanding Funding Velocity

Polynomial uses a unique "Funding Rate Velocity" model that provides more stable and predictable funding mechanisms.

What is Funding Velocity?

Funding Rate Velocity continuously changes funding rates on a block-by-block basis, based on position imbalances. This approach smooths out funding rate trajectories.

Key Features

• Dynamic Rates: Funding rates change continuously, not at fixed intervals

• Position-Based: Rates based on actual position imbalances

• Smooth Trajectories: Gradual changes instead of sudden jumps

• Zero-Sum: LPs neither gain nor lose funding over time

Mathematical Model

dr/dt = c × skew

Where:

• dr/dt is the funding rate velocity

• c is the velocity coefficient

• skew = (long_positions - short_positions) / skew_scale

How Funding Velocity Works

Rate Calculation

• Skew Analysis: Analyzes imbalance between long and short positions

• Velocity Calculation: Calculates rate of change using dr/dt = c × skew

• Continuous Updates: Updates every block based on current conditions

• Smooth Transitions: Gradual rate changes over time

Position Imbalance Response

• Long Skew: More long positions → funding rate velocity increases (rates drift higher)

• Short Skew: More short positions → funding rate velocity increases (rates drift lower)

• Neutral Skew: Balanced positions → funding rate velocity is zero (rates remain stable)

Benefits

Stability

• Smooth Transitions: No sudden jumps in funding rates

• Predictable Changes: Gradual rate adjustments

• Reduced Volatility: Less volatile funding rate environment

Fairness

• Position-Based: Rates reflect actual market conditions

• Real-Time Updates: Immediate response to market changes

• Transparent Calculation: Clear and understandable rate calculation

Efficiency

• Continuous Updates: Real-time rate adjustments

• Optimal Pricing: Rates reflect true market conditions

• Reduced Arbitrage: Fewer arbitrage opportunities

Comparison with Traditional Funding

Feature	Traditional Funding	Funding Velocity
Update Frequency	Fixed intervals (8 hours)	Every block
Rate Changes	Sudden jumps	Gradual adjustments
Volatility	High	Low
Arbitrage Opportunities	Many	Fewer

Practical Implications

For Traders

• Predictable Costs: More predictable funding costs

• Better Planning: Easier to plan funding expenses

• Fair Pricing: More transparent pricing

For Liquidity Providers

• Stable Returns: More stable returns from funding

• Risk Management: Better risk management through stable rates

• Predictable Income: More predictable income streams

Next Steps

• How to Use Funding Rates - Practical implementation

• Advanced Trading Strategies - Advanced strategies

• Risk Management - Protect your capital