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# Effective Funding Rate

## Overview

To ensure an attractive rate of return for the Writer Pool and allow for Writer withdrawal liquidity, base funding rates are adjusted to incentivize the system to meet a target utilization rate of total collateral in a Writer Pool.
When the Writer Pool is under the target utilization rate, contract funding rates are decreased to encourage Buyers to open new contracts.
Conversely, when the Writer Pool is above the target utilization rate, contract funding rates are increased to encourage Writers to deposit more collateral into the pool.
$FundingRate_{\:Effective} = \: f (FundingRate_{Base},\: Utilization Rate)$

### Volatility Multiplier

The base funding rate is adjusted based on utilization rates by a variable volatility multiplier (VM). So if expected volatility for Token A is X%, NIL will use X% * VM as the effective funding rate.
The volatility multiplier is increased when Writer Pool utilization is high, and is decreased when Writer Pool utilization is low. Mathematically, the volatility multiplier will increase or decrease the average expected ILV, and therefore the effective funding rate paid by Buyers to Writers.

## Utilization Target

The Writer Pool utilization rate target is set to 80%, with a volatility multiplier of 1.0.
So when the Writer Pool is at its target utilization rate, the effective funding rate is set to the fair market pricing of IL protection on the contract, based on expected volatility.
R-slopes for the volatility multiplier are set to:
• R0 from [0, 80%) = 0.2
• R1 from [80%, 100%] = 3.0
If the Writer Pool's utilization rate = 50%, a volatility multiplier of 0.92x would be applied to the expected volatility of tokens across each of its contracts. This would decrease the period's funding rate, and encourage more Buyers to open NIL contracts because IL protection is cheap.
Conversely, if the Writer Pool's utilization rate = 90%, a volatility multiplier of 1.38x would be applied to the expected volatility of tokens across each of its contracts. This would increase the period's funding rate, and encourage more Writers to deposit collateral because returns are high.