Fees & Funding

Audience: Traders, Market Makers, and Liquidity Providers

Goal: Understand how trade fees and funding rates operate within Twilight’s oracle-priced perpetual exchange.

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1. Overview

Every trade on Twilight interacts directly with the pooled BTC collateral, and all economic flows — fees, funding, and liquidation proceeds — accrue to or deduct from the pool’s Net Asset Value (NAV).

Twilight’s fee and funding structure is designed to:

• Reward liquidity providers for backing trader exposure,

• Discourage one-sided positioning through funding incentives, and

• Maintain an interest-free environment for all leveraged positions.

There are no protocol fees, treasuries, or insurance allocations in the current testnet; all flows remain internal to the pool.

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2. Trade Fees

Twilight applies simple and transparent trade fees based on execution type.

Fees are denominated in BTC (SATS) and automatically deducted from margin balances at fill.

Fill Type	How Determined	Fee Rate	Flow Destination
Taker	Market orders or limits that cross the oracle price immediately	0.04% (4 bps) of notional	100% to pool NAV
Maker	Limit orders that trigger later when oracle reaches your price	0.02% (2 bps) of notional	100% to pool NAV

• Maker / Taker Logic:

  Maker status depends purely on execution behavior, not on a residency score or on-chain ranking.

  Future iterations will expand maker eligibility to include liquidity stability and top-up responsiveness.

• Fee Currency:

  Fees are debited in BTC (SATS) and credited directly to the pool NAV at execution.

• Interest-Free Leverage:

  There is no margin interest or borrowing cost — leverage is provided natively by the pool, and fees are the only per-trade cost.

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3. Funding Rate

Funding in Twilight is not a mark-to-spot mechanism — prices already follow the external oracle.

Instead, funding functions as a skew-compensation mechanism that balances long and short exposure across the system.

Purpose

Funding transfers discourage directional imbalance (e.g., too many longs vs. shorts) and compensate liquidity providers for the risk of skewed inventory.

Interval

• Frequency: Hourly

• Accrual: Continuous

• Settlement: At position close or liquidation

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4. Formula

Twilight computes the hourly funding rate as follows:

skew_raw = (L_usd - S_usd) / (L_usd + S_usd) # -1 .. +1 
rate_hr = (skew_raw * skew_raw) / (psi * 8) # unsigned 
rate_hr = rate_hr * sign(skew_raw) # apply direction

Variable	Description
L_usd	Total notional of all long positions
S_usd	Total notional of all short positions
psi	Governance-tunable scalar (currently 1 in testnet)
rate_hr	Hourly funding rate applied to each position

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5. Funding Direction

Funding flows are applied per position based on the current skew:

Market Condition	Payer	Receiver	Residual
Long-heavy (L > S)	Longs pay	Shorts receive	Residual to Pool NAV
Short-heavy (S > L)	Shorts pay	Longs receive	Residual to Pool NAV

This residual ensures that aggregate funding always closes into the pool, contributing directly to LP yield.

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6. Application Basis

Funding is applied to margin balances, not to total notional.

Each open position accrues funding continuously and settles once — either when the position closes voluntarily or is liquidated.

Mathematically:

funding_pos_usd = position_notional_usd * rate_hr
funding_pos_btc = funding_pos_usd / mark_price_usd

The corresponding BTC amount is credited or debited to the trader’s margin and mirrored in the pool NAV.

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7. Economic Impact

Stakeholder	Impact
Trader	Pays or receives hourly funding depending on market skew; experiences no borrowing interest.
Liquidity Provider (LP)	Receives residual funding transfers as BTC-denominated yield.
Pool	Aggregates all fees and residual funding into NAV; absorbs directional skew risk.

Funding thus acts as the balancing mechanism that rewards LPs for maintaining capacity while ensuring the market remains directionally neutral.

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8. Example Scenario

Parameter	Value
Total Long Notional (L_usd)	$1,200,000
Total Short Notional (S_usd)	$800,000
Skew (skew_raw)	(1.2M – 0.8M) / (2.0M) = 0.20
Hourly Funding Rate (rate_hr)	(0.20²) / (1 × 8) = 0.005 = 0.5 % / hr

• Longs pay 0.5 % / hr on margin; shorts receive the same.

• The small residual (from precision rounding) flows to the pool.

• LPs earn this residual plus collected trade fees, denominated in BTC.

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9. Future Evolution

The fee and funding system will evolve with upcoming releases:

• Dynamic Funding Curves: Skew-sensitive multipliers tuned by governance.

• Maker Stability Program: Fee reductions for LPs that maintain uptime and top-up responsiveness.

• Treasury Allocation: Introduction of protocol-level fee splits post-mainnet.

• Funding Derivatives: Potential tokenized funding rate markets (research stage).

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Funding & Fee Flow Diagram

Diagram Explanation

• Longs ↔ Shorts: Hourly funding transfers move between opposing sides depending on market skew.

• Pool (LPs): Collects all trade fees and residual funding difference as BTC-denominated yield.

• No External Sink: 100% of flows stay internal — reinforcing Twilight’s closed-loop BTC economy.

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10. Summary

Twilight’s fee and funding framework rewards stability and neutrality:

• No interest cost, no slippage, no hidden spreads.

• Fees flow entirely to the liquidity pool.

• Funding compensates for directional skew, keeping markets balanced.

• LPs earn yield directly from trader activity.

This structure unifies traders and liquidity providers under one transparent, BTC-denominated incentive system.

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See also:

Pricing & Execution · Pool Mechanics · PnL & Settlement · Liquidations