Funding Rates

The Mechanism

The funding rate is the tether that keeps perpetual contract prices aligned with spot prices. It is a periodic payment exchanged directly between traders.

When Funding is Positive:

• Represents a bullish sentiment (Perp Price > Spot Price).

• Longs pay Shorts.

• This incentivizes arbitrageurs to short the perp (to earn funding) and buy spot, bringing prices back in line.

When Funding is Negative:

• Represents a bearish sentiment (Perp Price < Spot Price).

• Shorts pay Longs.

• This incentivizes arbitrageurs to long the perp (to earn funding) and sell spot.

Calculations

Funding Rate = Premium Index + Interest Rate

• Premium Index: derived from the difference between the Mark Price and the Index Price.

• Interest Rate: A base component representing the difference in interest rates between the base and quote currencies (typically small for crypto).

Settlement Frequency

Funding is settled every 8 hours.

• Liquidation of funding occurs instantly if you close your position.

• If you hold the position through the funding timestamp, the fee is added to or subtracted from your collateral.