[eUSS] Underlying Derivatives: Perpetual Contracts
A crypto perpetual contract is a derivative product traded on cryptocurrency exchanges that mimics futures contracts but has no expiry date and incorporates funding rate.
Last updated
A crypto perpetual contract is a derivative product traded on cryptocurrency exchanges that mimics futures contracts but has no expiry date and incorporates funding rate.
Last updated
On the short side of eUSS' delta-neutral position, USS short SOL perpetual contracts. This section will explain what perpetual contracts are and how they work.
A futures contract is a standardized financial agreement to buy or sell a specific asset, such as a cryptocurrency, at a predetermined price on a specified date in the future. Futures allow traders and investors to speculate on the price of the underlying asset without having to own or deliver the assets. Perpetual contract is a type of future contract that has no expiry dates. Thus, investors can hold a perpetual contract forever.
The spot market is the market where cryptocurrencies are bought and sold for immediate delivery. In our case, it would be the market that people can buy and sell SOL token directly, which is different from the perpetual market. Because perpetual contracts and spot SOL are traded in separate markets, perpetual contracts' price and price changes can deviate from the spot market's due to factors like supply and demand dynamics or market sentiment. For example, during SOL's bull runs, the demand on SOL perpetual contracts can be too large, leading to SOL perpetuals trading at a much higher price than spot SOL.
To keep perpetuals' and spot price aligned, perpetuals' price is constantly adjusted by a mechanism called the funding rate.
Basically, funding rates are calculated periodically (often every few hours) based on the difference between the contract price and the spot price. If the contract price is trading above the spot price (indicating a long position dominance), long traders pay funding fees to short traders, and vice versa if the contract price is below the spot price. This mechanism helps balance the market by incentivizing traders to take positions opposite to the current trend, thus reducing the deviation between the contract price and the spot price.
Funding rate calculation interval: 1 hour
Funding Rate calculation formula: (1/24) * (Market TWAP - Oracle TWAP)/Oracle TWAP
Time-weighted Average Price (TWAP): TWAP is calculated by summing prices at multiple points across a set period and then dividing this total by the total number of price points. For example, if we calculate SOL's TWAP of 1-hour with interval of 20 seconds, we need to sum SOL's price every 20 seconds and divided the total by number of 20-second-intervals within an hour).
Market TWAP: the TWAP of perpetual contracts traded on Drift.
Oracle TWAP: the TWAP of spot SOL provided by the relevant oracle.
Note: Funding rate changes' magnitudes are clamped at 0.12626% and are delayed at large divergences
The total funding fee we receive on our position: Funding Fee = Funding Rate x Position Size.
Historically, SOL's funding rate stay positive for the majority of time. Please refer to for historical data and our safeguard measure in the event of negative funding rate.
The funding rate is calculated using a formula that takes into account the premium or discount of the perpetual contract and the interest rates of both long and short positions. On , the funding rate calculation is simplified as follow:
