Funding

For conventional perpetual swap exchange, funding payment is used to keep the perp price close to the external index price of the underlying asset. For example, if the mark price of the perp is higher than the index price, longs pays shorts periodically to incentivize more shorts to bring the mark price close to index price, and vice versa.

Since the funding mechanism is not user friendly for non-professional traders and it is hard to implement funding for tokenized positions, Pika Exchange incorporates the funding payment into the price of the perpetual contract to make it more intuitive. If the mark price deviates from index price by a threshold, the protocol will move its price towards the index price every second.

For example, if the mark price is higher than index price by a threshold, the protocol will start to move its price lower towards the index price. The movement is determined by the deviation amount and the movement happens every second. This allows the short positions to be closed at a price that is lower than without price adjustment, leading to higher profit for shorts and lower profit for longs. Also, since the price adjustment action can be detected before it starts, it is a good profit strategy for traders to open shorts before the adjustment and close shorts after the adjustment. In this way, more shorts positions are incentivized while long positions are disincentivized, moving the mark price even quicker to the index price.