Funding Rate

What is the Funding Rate?

The Funding Rate is a periodic payment exchanged between buyers and sellers in the perpetual contract market. Its primary function is to ensure that the contract price stays aligned with the spot price of the underlying asset. By incentivizing or disincentivizing certain market behaviors, the funding rate helps to drive the perpetual contract price closer to the spot price. Typically, funding rates are settled at regular intervals, such as every 4 or 8 hours.

The Role of the Funding Rate

In perpetual contract markets, the trading price of the contract can deviate from the spot price of the underlying asset. When this occurs, the funding rate mechanism comes into play by requiring traders to either pay or receive funding, depending on their positions, in order to reduce the price discrepancy and encourage the convergence of the contract price with the spot price.

For example:

• When the perpetual contract price is above the spot price, traders holding long positions (buyers) are required to pay funding to traders holding short positions (sellers).

• Conversely, when the perpetual contract price is below the spot price, traders holding short positions must pay funding to long traders.

Additional Details:

The funding rate is not set by the exchange itself, but rather determined by the market, based on the price disparity between the perpetual contract and the spot price. It ensures that the perpetual contract market remains balanced over time.

The funding rate can have a significant impact on the profitability of holding long or short positions over time, and is a critical factor for traders to consider when trading perpetual contracts.

Additionally, if the funding rate is positive, it indicates that the perpetual contract price is higher than the spot price, meaning longs pay shorts. If the funding rate is negative, it implies that the perpetual contract price is below the spot price, meaning shorts pay longs.