Funding Rate

The Funding Rate is a regular payment exchanged between traders with long positions and those with short positions in perpetual futures contracts. This system helps keep the contract's price close to the actual market price of the asset. Unlike conventional futures, perpetual contracts do not have expiration dates, making it essential to employ a mechanism that encourages convergence with the spot price.

Purpose of the Funding Rate

In perpetual futures markets, the absence of an expiration date can lead to persistent deviations from the underlying asset’s spot price. The Funding Rate structure incentivizes traders to assume positions that counteract such imbalances. If the perpetual price trades above the spot price, the Funding Rate typically becomes positive, prompting long position holders to pay short position holders. Conversely, if the perpetual price is below the spot price, the Funding Rate often turns negative, inducing short position holders to compensate long position holders. This periodic payment cycle ensures that perpetual futures prices remain closely anchored to the underlying market value.

Funding cadence

The funding rate (FR) is computed once every 8 hours per trading pair. Settlements occur hourly, with each hour charging/crediting a pro-rated amount of FR ÷ 8 between long and short position holders.

Components of the Funding Rate Calculation

The Funding Rate (fr) is determined by incorporating the Average Premium Index (aP), the Interest Rate, and the current Premium Index (P):

$$pi = (max(0, impactBid - markPrice) - max(0, markPrice - impactAsk)) / markPrice piAvg = movAvg(pi, -8 hours) frRaw = piAvg + min(max(ir - piAvg, -piLimit), piLimit) fr = min(max(frRaw, -frLimit), frLimit)$$

Where:

• impactBid - volume-weighted average execution price for a USD 1,000 market buy, computed from the current order book.

• impactAsk - volume-weighted average execution price for a USD 1,000 market sell, computed from the current order book.

• ir - interest coefficient, set to 0.01%.

• piLimit - premium index band (corridor) size, set to 0.05%.

• frLimit - commission cap, set to 0.375%.

Example Calculation

Consider a scenario with the following parameters:

Given:

• mark price = $50,850

• impactBid = $50,050

• impactAsk = $50,150

• ir = 0.01%

• piLimit = 0.05%

• frLimit = 0.375%

1. Premium Index: pi = (0 - (50850 - 50150)) / 50850 = -0.0138%

2. 8-hour average: piAvg = -0.0141%

3. Raw funding rate: frRaw = -0.0141% + clamp(0.01% - (-0.0141%), -0.05%, 0.05%) = 0.0100%

4. Final rate: fr = clamp(0.0100%, -0.375%, 0.375%) = 0.0100%

A $51,000 long position pays $5.10 (51000 × 0.0100%) to short holders over the 8-hour funding period.

Impact on Trading Strategies

The funding rate mechanism serves several crucial functions:

• Price Convergence: Maintains alignment between perpetual futures and spot prices

• Market Balance: Incentivizes traders to take opposing positions when imbalances occur

• Risk Management: Provides a clear cost structure for position maintenance

• Market Efficiency: Contributes to overall market stability and price discovery

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