Volatility Tokens Technology

Rebase Mechanism, and Funding Fees

Rebase

Rebasing, also known as "supply smoothing" means adjusting the token supply so the token value will be pegged to the CVI index. This means, the volatility tokens are elastic tokens and use the rebase mechanism, to deduct the funding fees and keep them pegged to the index.

The rebasing of the token is performed every day at 00:00 UTC.

The action is performed automatically by utilizing Chainlink Keepers. Chainlink keepers allow for the automation of smart contracts actions using a chain of reliable node operators in a decentralized way.

First, the rebase mechanism queries the Chainlink oracle to get the latest CVI value, which is the target value of the rebase operation, $target\_value$. A rebase lag is applied in order to ease supply changes, and depends on the amount the position value has deviated from the CVI. The $rebase\_threshold$, currently set to 0.05, essentially limits the supply change of a single rebase operation to 5%. A rebase lag of 2, for example, implies that the target value is supposed to be met within approximately two rebase operations, assuming the position and target values are fixed. The target value and the volatility tokens position value are used to calculate the $deviation$, which is the absolute value of the difference between both values, adjusted by the $rebase\_lag$:

$$rebase\_lag=\left\lceil \frac{|position\_value-target\_value|}{rebase\_threshold\cdot target\_value}\right\rceil$$

$$deviation=\frac{|position\_value-target\_value|}{rebase\_lag}$$

As the rebase operation's target value is the index price, it decreases the supply, thereby rising the token price to match the index. This allows for the collection of funding fee over time, while remaining peg to the index.

Funding fee

The funding fee is the fee paid by the traders or users who mint volatility tokens, to the liquidity providers as compensation for taking the risks.

The funding fee is calculated according to the CVI Index value over time (per hour). Basically, the higher the CVI value, the lower the funding fee percentage. The funding fee rate is updated according to new values of the CVI Index.

Below is the graph that shows the funding fee percentage according to the CVI index value: