Funding Rates

The Funding Rate as a Yield Mechanism

The Funding Rate is not only a tool for balancing the USDN protocol but also a source of yield for USDN holders. For more detail on the mechanism please refer to the Funding Rate section.

How Does the Funding Rate Generate Yields?

When Long positions dominate the market, the funding rate becomes positive. Traders in long positions then pay fees to the vault. Since the value of USDN is directly tied to the amount of underlying asset in the vault, this increase translates into yield for USDN holders.

Historical and Potential Yield

Historically, cryptocurrency markets have been largely dominated by long positions, resulting in a predominance of positive funding rates. For example, between October 2020 and August 2024, the average annual funding rates were 16.41% for the ETH/USD pair on Binance and 18.80% for the ETH/USDT pair on Bybit. During this period, funding rates were positive approximately 87% of the time, clearly illustrating an upward trend.

This dynamic is not surprising, as interest in cryptocurrencies continues to grow. With increasing adoption of digital assets and the expanding potential of the crypto market, there is little reason to believe that the market will become bearish in the long term. This continued bullish outlook makes crypto an attractive space for investors, further supporting the dominance of long positions and, consequently, positive funding rates.

While the USDN protocol's funding rates, as part of a decentralized perpetual system, may differ from those observed on centralized exchanges, these historical trends and the future potential of the crypto market suggest that the USDN protocol is well-positioned to capture positive yields.