# Borrow Rate Perpetuals

This perpetual contract is designed to replicate the cumulative borrowing cost of a reference Aave variable-rate loan, allowing traders to hedge interest rate risk or speculate on DeFi borrow conditions.

<table data-header-hidden><thead><tr><th width="175.59991455078125"></th><th></th></tr></thead><tbody><tr><td><strong>Characteristic</strong></td><td><strong>Description</strong></td></tr><tr><td><strong>What it Tracks</strong></td><td>The cumulative interest accrual of a variable-rate loan on Aave, represented by a borrow multiplier index.</td></tr><tr><td><strong>Index Definition</strong></td><td><p>A borrow multiplier index, J<sub>t</sub>, that grows based on the instantaneous Aave borrow rate, r<sub>t</sub>. It is defined as:</p><p></p><p><span class="math">J_t = \exp\left(\int_0^t \frac{r_s}{Y} ds\right)</span></p><p></p><p>where Y is the number of seconds in a year. This index represents the total growth factor of a loan's principal due to interest.</p></td></tr><tr><td><strong>Oracle Type</strong></td><td>A 24/7 on-chain oracle that reads the live variable borrow rate for a given asset directly from the Aave v2/v3 protocol pools or uses a smoothed nowcast of this rate.</td></tr><tr><td><strong>Market Type</strong></td><td>Cash-settled index perpetual.</td></tr><tr><td><strong>PnL Formula</strong></td><td><p>The PnL for a position with notional N is designed to perfectly match the interest accrued on an Aave loan of the same initial notional. The infinitesimal PnL is given by PnL<sub>t</sub> = NdJ<sub>t</sub>. Over a period [0, T], the total PnL is:</p><p>• PNL (Long) = N x (J<sub>T</sub> - 1)</p><p>• PNL (Short) = N x (1 - J<sub>T</sub>)</p><p>Where:</p><p>• N: The USD notional value of your position.</p><p>• J<sub>T</sub>: The value of the borrow multiplier index at the end of the period.</p></td></tr><tr><td><strong>Use Cases</strong></td><td><p><strong>Hedging (Long):</strong></p><p>• Borrowers on Aave can take a long position of the same notional value to perfectly neutralize the variable interest cost of their loan.</p><p></p><p><strong>Directional Trades:</strong></p><p>• Go long to speculate on rising Aave borrow rates (e.g., during periods of high utilization).</p><p>• Go short to speculate on falling Aave borrow rates.</p><p></p><p><strong>Arbitrage:</strong></p><p>• Trade the spread between Aave borrow costs and funding rates on other perpetual exchanges.</p></td></tr><tr><td><strong>Users</strong></td><td><p>• DeFi borrowers &#x26; lenders</p><p>• Relative-value &#x26; arbitrage funds</p><p>• Macro traders speculating on on-chain rates</p><p>• DAOs managing treasury debt</p></td></tr><tr><td><strong>Vol-stat (σ)</strong></td><td>Low-to-Medium. Aave borrow rates are generally less volatile than crypto asset prices but can experience sharp spikes during periods of high market stress and borrowing demand.</td></tr><tr><td><strong>Margin Numbers</strong></td><td>Derived from the max leverage tiers. For the initial leverage tier, the initial margin (IM) is a percentage of the notional position value (e.g., 33.3% for 3x leverage).</td></tr></tbody></table>

[See additional market mechanics and parameters](https://docs.nunchi.trade/market-mechanics-and-parameters#aave-borrow-rate-perp-market-parameters)


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