# Long Short Imbalance Safeguard

**Funding Rate**

The Funding Rate mechanism addresses the issue of long-short imbalances in the market, which can lead to one-sided exposure risks and market instability. By introducing an interest rate paid between traders with long and short positions, the AEE encourages a more balanced market and reduces potential risks.

The Funding Rate is depending on market conditions and is calculated and exchanged every 8 hours. This mechanism creates a more balanced market and protects LPs from one-sided exposure risks. Additionally, it can cost less for traders on the minority side, further promoting market balance.

Let's assume for a trading pair, e.g. ETH/USD, there is an m% position on long (or short) and n% position on short (or long), where 0% <= n% <= 50% <= m% <= 100%. And we have m% + n% = 100%. Assume the total fund rate = X%

1\. The heavier side (M side) pays the higher fee in PEX, assuming the amount is m/(m+n) \* X% per unit.

2\. The lighter side (N side) pays a lower funding fee, the amount is n / m+n \* X% per unit.

{% hint style="info" %}
Note: The formula is set to let the fee to the pool is around half of PEX if the same over-position size
{% endhint %}

Benefit

1. Protect the LP from the one-sided exposure risk

The Long Short Imbalance Safeguard mechanism helps protect LPs from the risks associated with imbalanced markets by addressing long and short position imbalances. By implementing a funding rate that encourages a more balanced market, the safeguard reduces the potential risks that LPs might face due to one-sided exposure. This protection fosters greater confidence among LPs, encouraging them to continue providing liquidity to the market, which ultimately contributes to a healthier ecosystem.

2. Provide extra return for the trader on the minority side

The Funding Rate mechanism rewards traders who hold positions on the minority side (lighter side) of the market by providing them with a funding fee. This incentive encourages traders to take contrarian positions, thereby promoting market balance. As a result, traders on the minority side can enjoy additional returns, making the trading experience more appealing and potentially attracting a larger and more diverse pool of market participants.

3. Higher trading volume with an arbitrage opportunity

The Long Short Imbalance Safeguard creates arbitrage opportunities by introducing a funding rate that balances long and short positions. These opportunities can attract more traders to the platform, seeking to profit from price discrepancies between different markets or trading pairs. As a result, the platform can experience higher trading volumes, leading to a more liquid and active marketplace. This increased activity can benefit all market participants by improving price discovery, reducing spreads, and creating a more vibrant ecosystem.


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