> For the complete documentation index, see [llms.txt](https://docs.smardex.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.smardex.io/ultimate-synthetic-delta-neutral/the-usdn-protocol/inside-the-protocol/3.-applying-the-funding-rate.md).

# 3. Applying the Funding Rate

After calculating the profits and losses (PnL), the protocol applies the [funding rate](/ultimate-synthetic-delta-neutral/the-usdn-protocol/glossary.md#funding-rate). The side with the higher exposure is the one that pays the funding rate. For instance, if the balance of the [vault side](/ultimate-synthetic-delta-neutral/the-usdn-protocol/glossary.md#vault-side-usdn-side) exceeds the trading expo of the [long side](/ultimate-synthetic-delta-neutral/the-usdn-protocol/glossary.md#long-side), the vault pays. Conversely, if the trading expo of the long side is higher, the longs are responsible for paying the funding rate.

However, calculating the funding rate is more complex than simply comparing the imbalance between the two sides. It incorporates several elements, including the level of imbalance, a five-day exponential moving average to smooth out fluctuations, and an adjustment factor that adapts to maintain the protocol's balance. For more details on this calculation and its mechanics, please refer to the [whitepaper](https://github.com/SmarDex-Ecosystem/usdn-contracts/blob/main/whitepaper/whitepaper.pdf).

**Impact on SDEX**

With each funding rate payment, 8% of the funding rate is allocated to a "buy back and burn" mechanism for SDEX tokens. This process permanently reduces the supply of SDEX, thereby increasing its value. It rewards SDEX holders and supports the value growth of the SmarDex token.


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