As demonstrated in System Design and Overview, the vAMM itself acts as an independent price discovery system. Hence, the vAMM price will at times deviate from the underlying spot market price (“Oracle Price”). On a long term basis, however, it is critical to have mechanisms in place that serve to converge the vAMM price and Oracle Price, such that traders can properly value the futures contract they hold (as there is no underlying NFTs traded in a futures contract transaction). Below is a list of markets factors / system design that promotes vAMM and Oracle price convergence.
Price Arbitrage takes place when a trader simultaneously buys and sells an asset in different markets to take advantage of a price difference and generate a profit. In the context of Tribe3 and NFT futures, it refers to a trader taking advantage of the vAMM and Oracle price gap by longing/shorting NFT futures on Tribe3 and underlying NFTs on the spot market.
For example, when the Oracle price is higher than the vAMM price, a trader can lock in market neutral profits by placing a long order on an NFT futures contract (based on the vAMM Price) and simultaneously placing a short/sell order on the underlying NFTs (based on the spot market price - if it is close to the Oracle price).
Traditionally, both vAMM and order book platforms that trade assets like crypto rely on price arbitrage and funding rate mechanism to reduce the difference. However, given the spot NFT market structure and the nature of vAMM NFT floor price futures, users must look at funding payment and price arbitrage in a different light as well as introduce a few mechanisms to optimize price alignment: