NIP-002: Proposed Changes to Odeshi Convergence Rewards

Abstract

This proposal, NIP-002, aims to introduce changes to the Odeshi Convergence Rewards mechanism to encourage convergers to maintain positions for a longer duration, bringing the mark price in line with the index, and ultimately reducing overall funding intensity.

Motivation

The current reward system for convergence trading may not provide sufficient incentives for traders to maintain positions for extended periods. As a result, the mark price may not stay in line with the index for a sufficient duration, leading to increased funding intensity. By introducing a duration factor into the reward calculation, traders will be incentivized to maintain their positions for longer, resulting in a more stable and efficient market.

Proposed Changes to Odeshi Convergence Rewards

Current Convergence Reward Formula

convergerRewardFormula = (convergeNotionalValue / totalConvergeNotionalValue) * 500,000 $NFTP

In the current reward formula, convergeNotionalValue is relative to the notional volume that converges when there is a >2.5% divergence between the mark and index. Volume is only considered after the position has been open for 15 minutes.

Proposed Changes

The proposed change involves the introduction of a durationFactor:

durationFactor = (tradeDuration / maxTradeDuration) ** D

To find the constant D, we use a minTradeDuration of 15 minutes and a maxTradeDuration of 150 minutes (2 hours and 30 minutes). Rewards will scale from 0.50 (15 minutes) to 1.0 (150 minutes).

The updated convergerRewardFormula incorporates the durationFactor:

convergerRewardFormula = (convergeNotionalValue * durationFactor / totalConvergeNotionalValue) * 500,000 $NFTP

Rationale for Changes

The introduction of the durationFactor incentivizes traders to hold converging positions for longer than 15 minutes, helping the mark price remain in line with the index for an extended period (reducing overall funding intensity).

Implementation

Upon approval of NIP-002, the proposed changes to the Odeshi Convergence Rewards mechanism will be implemented, and the updated reward formula will be applied.

Conclusion

The proposed changes to the Odeshi Convergence Rewards mechanism in NIP-002 aim to provide stronger incentives for convergers to maintain positions and bring the mark price in line with the index. By incorporating a durationFactor into the reward calculation, traders will be encouraged to maintain their positions for longer, creating a more stable and efficient trading environment on nftperp.