# 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**](https://github.com/Polynomial-Protocol/gitbook/blob/master/explanation/how-to/trading.md) - Practical implementation
* [**Advanced Trading Strategies**](https://github.com/Polynomial-Protocol/gitbook/blob/master/explanation/how-to/advanced.md) - Advanced strategies
* [**Risk Management**](https://github.com/Polynomial-Protocol/gitbook/blob/master/explanation/explanation/debt-mechanism.md) - Protect your capital


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