Glossary

APY

The funding rate on Contango is determined by the difference between the cashflow on the lending and borrowing legs of a position, which you normally see referenced as borrow APY and supply APY on the money market. That’s why it’s also called APY on the Contango UI. It can be positive or negative:

If it’s positive, it means the trader is receiving money to keep his position opened.

If it’s negative, it means the trader is paying money to keep his position opened.

In other words, Contango’s APY is equivalent to a funding rate, but its sign is inverted compared to other perp venues. It is accrued as PnL and it is settled when closing the position.

APY is different from ROE (return on equity).

Contango and backwardation

Contango, as a project, takes its name from contango which is financial lingo to indicate a market situation when the price of a futures contract is higher than the spot price of the underlying asset. Conversely, backwardation happens when the price of a futures contract is lowers than the spot price of the underlying asset.

Base and quote currency

An exchange rate between two currencies follows the base/quote notation, and indicates how much of the quote currency is needed to buy one unit of the base currency. For example, ETH/USDC = 1000 means that 1 ETH is equal to 1000 USDC. In other words, the base is the asset you want to trade, the quote is the currency in which that asset is quoted in.

Basis points

Basis points are often referred to as "bps" or "bips". A basis point is a unit of measure often used in finance to indicate percentages. 1 basis point is equal to 1/100th of 1%, or 0.01%. So, for instance, trading fees can be expressed as basis points: 0.05% = 5 bps.

Flash loan

A flash loan is a type of DeFi loan where an asset can be borrowed with no upfront collateral as long as it is returned within the same blockchain transaction.

Leverage

Leverage usually refers to borrowed capital that allows traders to amplify their buying or selling power. Leverage on Contango is determined by the loan-to-value ratio (meaning: how much you can borrow against your collateral) on the underlying money market.

Leverage is = 1/(1 - LTV ratio). If we take Aave’s parameters as a reference, we can see the amount of leverage that its standard LTV ratios can offer:

• 82.5% LTV is equivalent to 5.7x leverage (e.g. for ETH/DAI or ETH/USDC pairs)

• 90% LTV is equivalent to 10x leverage (e.g. for same-flavor pairs like stETH/ETH)

• 93% LTV is equivalent to 14.3x leverage (e.g. for stable pairs, like USDC/DAI or EUR/USDC)

Just like with money markets where there is a distinction between max LTV ratios and liquidation thresholds, on Contango there’s a max leverage to open a position and a higher leverage threshold at which traders get liquidated.

Liquidation price

It's the oracle price at which your positions is eligible for liquidation on underlying money markets. As a reminder, Contango doesn't perform any liquidation.

Loan-to-value ratio (LTV)

The LTV ratio defines the maximum amount of assets that can be borrowed with a specific collateral. It is expressed as a percentage (e.g., at LTV=82.5%, for every 1 ETH worth of collateral, borrowers will be able to borrow 0.825 ETH worth of the corresponding currency).

Margin ratio

This is the value of the margin, posted by a trader, relative to price to open a position.

Money market

Any market that offers borrowing and lending, either with variable or fixed rates. Variable-rate markets are used by Contango to build leveraged positions that consist of two legs, a borrowing and a lending one. The net APY determined by the variable rates of the two legs can be interpreted as the funding rate of the position, which in turn can be seen as a perpetual instrument. Contango could integrate fixed-rate markets too, to build fixed-rate positions that can be seen as dated futures.

Oracle vs market price

A market price is the real price at which an asset is traded. An example of market price is any firm quote on the entry price (shown with ✅ on the Contango UI).

An oracle price uses a decentralised price feed to value an asset. It is worth noticing that there are 2 types of oracle feeds that could be used by money markets:

a) exchange rate feed: reports the rate at which you can exchange, for instance, wstETH/stETH on the mainnet wstETH contract, so it's not affected by market forces trading on venues like Balancer, Uniswap, etc.

b) market price feed: reports at the current price at which, for instance, wstETH could be traded on the spot markets, regardless of the chain.

It's up to each money market to do the risk analysis on which feed they want to use. For instance, for wstETH/ETH, Aave and Spark use the exchange rate feed, while Exactly use the market rate feed. An excellent thread by Stephen from Defi Dojo recaps the differences and the risks of the two types.

Market impact on rates

It indicates by how much your trade size will impact the APY of the instrument you're trading. In other words, for all markets (except lending on Exactly), Contango has a copy of the interest rate models that the underlying market uses on the UI, and applies said algorithm to what the new lending and borrowing amounts would be in the respective pools.

To our knowledge, Contango is the only protocol using this advanced feature. In an ideal world, everyone uses Contango and by simply looking at the market impact of their trade on the rates they might refrain from entering a trade which flips the rates or dilutes the yield substantially. So, even if you don't plan to trade on Contango, it is highly recommended to use it for simulation purposes, to avoid yourself and others any nasty surprise on the rates.

Spot market

A market that offers swapping assets at a spot price. eg. Uniswap.

Tokenized NFT position

An ERC-721 Non-Fungible Token that represents ownership of a position. Tokenizing a position allows the independent transfer of its ownership without the need to update Contango's internal accounting. This enhances composability, as positions can be bought and sold on a secondary market or in a private transaction, and potentially used as collateral in third party protocols.