Interest

The existing futures trading market operates with separate markets for underlying assets and futures, resulting in price disparities. Arbitrage traders participate in both markets mitigating these price differences.

Existing futures have fixed maturity dates, allowing arbitrageurs to pursue risk-free profits when the futures and underlying asset prices converge. On the other hand, perpetual futures, which have no expiration, introduce funding rates to provide statistical arbitrage opportunities. In order book based perpetual futures, traders in the overshooting direction must pay funding fees to traders in the opposite direction. And, in AMM-based perpetual futures, takers pay funding fees to makers. Therefore, perpetual futures rely on funding fees to mitigate price discrepancies.

However, the existing approaches above have a problem in that funding fees are not determined by market supply and demand. Instead, they are determined by a discretionary and deterministic formula. Excessive funding fees can have a negative impact on trader profits, while insufficient funding fees can lead to basis divergence between the underlying asset and futures prices.

Chromatic eliminates the possibility of basis divergence between the underlying asset and futures prices by delegating the price discovery function to an external oracle. Also, we introduce dynamic fees based on market supply and demand, allowing for the determination of an appropriate basis by the market. Therefore, our Chromatic Protocol does not require funding fees to mitigate basis discrepancies between the underlying asset and futures prices.

Instead, the Chromatic Protocol has an interest. The interest is a fee that takers pay to makers for utilizing liquidity that makers provided. It differs from the concept of funding fees found on other existing protocols or futures markets.

The currency of interest being paid is determined based on the type of settlement token provided by the maker and is unrelated to the type of underlying index. For example, if the settlement token is USDT, the taker should pay USDT as interest for any underlying index.

The calculation of the interest is as follows:

• Utilized Margin x Holding Period (days/365) x Interest Rate.

The interest is deducted from the margin and PnL when the position is closed.

Currently, the annual interest rate for USDT is set to 10%. The interest rate is determined by the Federal Reserve's USD interest rate + risk premium of depegging associated with each settlement token(as depegging risk varies for each token). The interest rate can be adjusted through voting by the DAO in the future, granting flexibility in interest rate determination.