Anatomy of a Perp · Ch. 09

Open Interest and Skew

Everyone piles long. The chart looks unstoppable, so more longs pile in. But the more crowded that side gets, the more it costs to stand on it, until holding the popular bet has quietly become the expensive one. The crowd is the trap.

The Idea

Intuition

Open interest is the size of the game: the total value of all positions currently open. Not volume, which is how much has traded, but how much is riding right now.

Split that by side and you get skew. Are longs or shorts carrying more? A market with equal weight on both sides has zero skew. When one side outweighs the other, the book is lopsided.

Back in Chapter 6, funding pulled the perp toward spot. Skew is the other half of the story. Real protocols lean the funding rate toward the crowded side, so the popular bet pays the lonely one. Pile onto the majority and you pay to be there. Take the minority and you get paid to hold it. That’s the market quietly bribing traders to balance the book.

Watch the book tilt, then set the two sides yourself.

The Math

How It’s Calculated

In plain terms: open interest is the sum of everything open, skew is how far off balance the two sides are, and funding gets nudged in proportion to that skew.

Open interest adds up every open position’s size:

\text{OI} = \sum_i \lvert \text{size}_i \rvert

Skew is the imbalance between the sides, from $-1$ (all short) through $0$ (balanced) to $+1$ (all long):

\text{skew} = \frac{\text{OI}_{\text{long}} - \text{OI}_{\text{short}}}{\text{OI}_{\text{long}} + \text{OI}_{\text{short}}}

Funding then carries a skew term on top of the premium from Chapter 6, so the rate grows with crowding:

\text{funding} = \underbrace{\tfrac{\text{premium}}{8}}_{\text{tracks spot}} + \underbrace{k \cdot \text{skew}}_{\text{leans on the crowd}}

The constant $k$ is a dial each protocol sets: how hard to push the crowded side back toward balance.

funding from skew

+0.000%

open interest $100m · skew 0%

longs

$50m

shorts

$50m

all shortbalancedall long

Longs and shorts balanced. Skew is zero.

Note

Skew isn’t only a funding dial, it’s a risk gauge. A wildly lopsided book means the protocol’s counterparty (the pool or the other side) is carrying a big directional bet, whether it wants to or not. Keeping skew in check is really about keeping that exposure survivable. More on who takes the other side in Part III.