Index Methodology

ISFR is Nunchi's benchmark for onchain secured funding. It separates the slow-moving cost of spot capital from the faster cost of secured leverage, then combines them into one benchmark rate.

1. Base Rate

The base rate represents the floor cost of capital: what users can earn by lending stablecoins in deep, over-collateralized lending markets without directional exposure.

The base rate is a weighted average of approved lending sources:

R_base = sum(w_i * r_i) for each source i in L

Where:

• L is the set of approved lending sources, such as Aave V3 and Compound V3.
• r_i is the annualized supply APY for source i.
• w_i is the governed liquidity weight for source i.
• All weights sum to 1.

Example:

Source	Weight	Rate
Aave	60%	1.97%
Compound	40%	2.56%

R_base = (0.60 * 1.97%) + (0.40 * 2.56%) = 2.20%

2. Derivatives Spread

The derivatives spread measures the difference between fast-moving secured leverage rates and the slower base lending rate.

S_deriv = R_deriv - R_base

Where:

• R_deriv is the aggregate secured leverage yield from sources such as perp funding and basis markets.
• R_base is the weighted spot-lending base rate.

Interpretation:

• Positive S_deriv: leverage demand is above the spot lending baseline.
• Negative S_deriv: leverage demand is below the spot lending baseline.

3. Risk Premium

Raw derivatives spreads can move too quickly to use directly as a benchmark. ISFR dampens that spread with a governed alpha scalar.

P_risk = S_deriv * alpha

Where:

• P_risk is the dampened risk premium.
• alpha is the dampening scalar, currently 0.25.

Example:

S_deriv = -86.9 bps
alpha = 0.25
P_risk = -86.9 bps * 0.25 = -21.7 bps

4. Final ISFR

The final benchmark combines the base lending rate with the dampened risk premium:

ISFR = R_base + P_risk

Expanded:

ISFR = R_base + alpha * (R_deriv - R_base)

Live-style example:

Component	Value
Base rate R_base	1.97%
Derivatives spread S_deriv	-86.9 bps
Risk premium P_risk	-21.7 bps

ISFR = 1.97% + (-0.217%) = 1.75%

Index Goals

1. Manipulation resistance: An attacker would need to distort both deep lending markets and derivatives funding sources.
2. Benchmark compatibility: The structure mirrors traditional base-rate plus spread models.
3. Mean reversion: The alpha scalar dampens short-term volatility so the benchmark can support pricing, risk, and yield models.