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.

Calculation Intervals and Payment Frequency

The Funding Rate is recalculated every eight hours for each trading pair. At these predetermined intervals, a snapshot of the market conditions is taken, and the resulting Funding Rate applies to the subsequent period. Payments based on this rate are processed automatically, typically on an hourly basis, without requiring any additional action by traders. The protocol does not retain any fees from these transactions; its sole function is to facilitate the automated exchange of funds between market participants.

Components of the Funding Rate Calculation

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

Funding Rate = Average Premium Index + clamp(Interest Rate - Premium Index, 0.05%, - 0.05%)

• Premium Index (P): The Premium Index measures the deviation between the perpetual futures and the spot prices, factoring in liquidity and order book depth via Impact Bid and Impact Ask Prices. These parameters are designed to mitigate price manipulation and reflect a fair market value.

Premium Index (P) = [Max(0, Impact Bid Price – Price Index) – Max(0, Price Index – Impact Ask Price)] ÷ ((Best Bid + Best Ask) ÷ 2)

• Average Premium Index (aP): To reduce short-term fluctuations, the Premium Index is sampled frequently (e.g., every 5 seconds) over the eight-hour period, resulting in thousands of data points. These values are averaged to produce the aP, ensuring a more stable and representative measurement for the Funding Rate calculation.

• Interest Rate: A baseline interest rate (commonly around 0.01% per day) is incorporated into the Funding Rate formula. By combining the Interest Rate and the Premium Index within defined boundaries (±0.05%), the clamp function ensures that Funding Rate volatility remains controlled.

Example Calculation

Consider a scenario with the following parameters:

• Index Price: $50,850

• Impact Bid Price: $50,050

• Impact Ask Price: $50,150

• Best Bid: $50,035

• Best Ask: $50,124

• Daily Interest Rate: 0.01%

Calculating the Premium Index (P) may yield approximately 0.0139%. If the eight-hour average Premium Index (aP) is determined to be 0.0141%, the Funding Rate might be calculated as follows: F = 0.0141% + clamp(0.01% – 0.0139%, +0.05%, -0.05%) = 0.0141% + (-0.0039%) = 0.0102%

If a trader maintains a $51,000 long position during the period governed by a Funding Rate of 0.0102%, the eight-hour funding payment would be $51,000 × 0.0102% ≈ $5.2 from the long position holder to the short position holder, thereby maintaining equilibrium in the market.

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

This trading infrastructure positions EVEDEX at the forefront of decentralized derivatives trading, offering the performance and features of traditional exchanges while maintaining the benefits of decentralization. The platform's ability to handle complex options trading requirements while ensuring high performance and reliability makes it suitable for both retail and institutional traders.