It’s been an exciting month thus far, with trading volume on Arbitrum surpassing $10 billion and the implementation of a front-end UX upgrade.
A major overhaul to the fee structure has been prepared for gTrade v6.3.2, consisting of the introduction of borrowing fees, the removal of funding fees, and the lowering of rollover fees.
Let’s dive into the details!
Issues with Current Funding Fees
The funding fee model used by most platforms has proven inefficient for gTrade’s specific needs.
The model struggles to balance OI on each trading pair and limit the gDAI vault’s PnL drawdown risks due to the challenges faced by funding fee farmers.
These challenges arise from the rapid changes in net exposure that can occur on each pair, not allowing funding fee farmers enough time to profit after fees.
To make funding fee farming consistently profitable, there are two options:
- Significantly increase funding fee APRs, negatively impacting most traders.
- Reduce fees and spreads for the side earning funding fees, ultimately limiting the protocol’s revenue.
If the funding fee APR was high enough and the fees were low enough, it might be beneficial for funding fee farmers. However, all pairs would still require a maximum OI to prevent short-term imbalances from posing too much exposure risk. Scaling with this model would make many pairs end up with their maximum OI reached on both sides which means they would no longer generate any revenue.
These are unviable and unsustainable options for the protocol and its users.
Introducing gTrade’s Borrowing Fee Structure
gTrade v6.3.2 introduces a shift from funding to borrowing fees, creating a more efficient approach to managing open trades’ profit risk.
Borrowing fees treat open trades of the dominant side as vault borrowers. This enables greater scalability of max OI per pair without increasing vault TVL.
This new model also allows for a more dynamic and adaptive fee structure and addresses the inefficiencies associated with funding fee arbitrage, as borrowing fees are distributed directly to the vault as negative PnL.
This creates a major edge for the protocol, enabling better risk management and letting traders open larger positions without increasing fee APRs.
Understanding Borrowing Fees
Borrowing fees are charged on the dominant side, where most of the open interest is. If there is for example $10m long open interest and $5m short open interest on a pair, longs will pay the borrowing fee and shorts won’t pay anything.
To fully grasp the borrowing fee structure and its benefits, it’s important to understand three key concepts — borrowing APR, pair borrowing, and group borrowing.
The borrowing APR represents the borrowing fee charged for a specific trading pair or group of correlated pairs at 100% vault utilization (net OI = vault TVL).
It is calculated using the following methodology:
Borrowing APR = volFactor / Max vault exposure % * marketFactor
- volFactor: volatility coefficient (more volatility = more expensive).
- Max vault exposure %: This parameter is set depending on how much maximum vault exposure is targeted ideally.
- marketFactor: The coefficient allows for adjusting costs for groups of pairs (between 0 and 1).
volFactor is calculated as follows:
volFactor = (dailyVolatility * 365) ^ 1.25 / 150
dailyVolatility = (3 * Avg_Daily_ATR%_1_Days + 2 * Avg_Daily_ATR%_7_Days + Avg_Daily_ATR%_30_Days ) / 6
The daily ATR % is a technical indicator measuring an asset’s daily volatility in percentage. For groups, the average value for all pairs is used instead. The weighted average of recent and older volatility allows us to consider short-term and longer-term volatility.
The max vault exposure % is set at 20% based on historical trading data collected until now.
The marketFactor is 1 on all pairs (no effect on the APR) and for groups, it will be proportional to the correlation of all pairs it contains (low correlation 0 = closer to 0, higher correlation = closer to 1). This leads to a lower cost on the group level which allows for more activity on popular pairs of the group without increasing the fees on all its other pairs too fast.
- BTC/USD (volFactor = 60, max vault exposure % = 20%, marketFactor = 1) → 60 / 0.2 * 1 = 300%
- Crypto group (volFactor = 70, max vault exposure % = 20%, marketFactor = 0.5) → 70 / 0.2 * 0.5 = 175%
Finally, the 300% and 175% borrowing APRs of the example above respectively represent 60% and 35% APR at 20% vault exposure (= the max targeted vault exposure).
Please note that the examples above do not represent the exact values that will be set as the volatility changes all the time, they are just examples.
Pair borrowing refers to the holding fee associated with each trading pair. It is calculated based on the net OI and borrowing APR for a specific pair and on the vault TVL.
The APR charged at any point in time is calculated using the formula:
Borrowing APR * Net OI / Vault TVL
Let’s break down the calculation using the following set of values for a specific pair:
- Borrowing APR: 40%
- Net OI: $5 million
- Vault TVL: $50 million
Pair Borrowing APR: 40% * ($5 million / $50 million) = 4%
Under the new structure, pairs that are significantly correlated are grouped, and a group borrowing fee is applied.
The group borrowing fee APR is calculated using the same formula as pair borrowing, considering the total net OI of all pairs within the group, the group borrowing APR, and the vault TVL.
Let’s consider a theoretical group of correlated forex pairs for example:
- Borrowing APR: 30%
- Net OI: $8 million (across all pairs in the group)
- Vault TVL: $50 million
Group borrowing APR: 30% * ($8 million / $50 million) = 4.8%
It should also be noted that each pair can only be in one group. If a pair isn’t significantly correlated to other assets, it is not part of any group (no group fee).
Final Borrowing Fee Calculation
The final borrowing fee paid by the user at any point in time is determined by the maximum of the pair borrowing fee and the group borrowing fee.
For example, if the pair APR is 4% and the group APR is 4.8%, the user will pay 4.8%.
This method ensures that the platform’s overall risk is managed effectively, considering the exposure of individual and correlated trading pairs.
Borrowing Fee Benefits
To sum up, the new borrowing fee structure offers several advantages over the previous funding fee model:
- Enhanced Efficiency: Borrowing fees are 100% efficient for the protocol since they go directly into the vault as negative PnL.
- Better Over-Collateralization: The borrowing fee structure supports the over-collateralization of the vault and enhances liquidity providers’ capital safety.
- Exposure Regulation: The borrowing fee structure regulates net exposure using a negative incentive, leading traders to avoid / close too expensive positions.
- Reduced Rollover Fees: While the borrowing fee does not replace the existing rollover fee, it will become 3x lower (making lower leverages cheaper).
- Improved Risk Management: By considering individual trading pairs and correlated asset groups, borrowing fees better manage the platform’s overall risk exposure.
- Increased Revenue Generation: Aligns the protocol fee structure to maximize revenue generation with scaling open interests and volume.
- Better scaling: With stronger price exposure risk management, we can significantly increase max open interests allowed on all pairs without needing more vault TVL.
More vault TVL is only necessary to make the same net exposure on pairs/groups cheaper for traders. This means it still plays a role in scaling the volumes, but it is not a full bottleneck like before.
The gTrade v6.3.2 development update marks a significant step forward for the platform.
By replacing the funding fee structure with borrowing fees, gTrade has created a safer and more effective fee system that benefits both the platform and its users — simultaneously improving the risk management of the protocol and allowing for maximum open interests to scale faster.
gTrade v6.3.2 smart contracts have been fully unit tested and sent for audit with Halborn, and the results are expected within a week. Transitions and testing have also been successfully conducted on the Mumbai testnet.
On May 11th, the contracts were deployed on the Polygon and Arbitrum mainnet, and timelocks were initiated. The transition to the mainnet can occur two weeks after the timelock initiation.
However, if the audit demands a change in the contracts, they will need to be redeployed, which would require another two-week timelock period. If no changes are needed, gTrade can proceed with the transition starting from May 25th.
Finally, a trading contest will be hosted shortly after the update has been released and max open interests increased. More details on this soon…
Enjoy the updates and happy trading, gTraders!
Please note that the parameters mentioned above may be subject to change in the future and will be optimized based on trading activity. Any changes will be announced in advance.