Funding Rates
Overview
Funding rates are a mechanism used by perpetual futures contracts to keep the contract price aligned with the underlying spot market price.
Because perpetual contracts do not expire, funding helps anchor the perp price to spot by creating a periodic payment between traders on opposite sides of the market.
How funding works
Funding is a peer-to-peer payment exchanged between longs and shorts.
If funding is positive, longs pay shorts
If funding is negative, shorts pay longs
The platform itself does not typically collect these funding payments (aside from any separate trading fees). Funding is a transfer between market participants.
Why funding exists
If a perpetual contract is trading above spot, long positions are usually more crowded and funding tends to be positive. This makes longs pay shorts, which encourages more short interest and helps bring the perp price back toward spot.
If a perpetual contract is trading below spot, funding tends to be negative. In that case, shorts pay longs, encouraging more buying and helping the contract price move closer to spot.
This mechanism helps reduce persistent price gaps between the perpetual market and the underlying asset.
What determines the funding rate
Funding is generally made up of two components:
1) Interest component
Many perpetual markets include a fixed or predetermined interest component in the funding formula.
This reflects the cost difference between holding quote currency (for example, USD or stablecoins) and holding the underlying asset. Some venues use a fixed reference value for consistency across markets.
2) Premium component
The premium component reflects whether the perpetual contract is trading above or below the underlying spot/oracle price.
If the perp trades above spot/oracle, the premium is positive
If the perp trades below spot/oracle, the premium is negative
This premium is usually calculated using a fair pricing method (such as oracle prices and order-book impact prices) rather than a single last-traded price.
Funding payment frequency
Funding is typically calculated on a recurring schedule (for example, hourly or every 8 hours).
Some platforms express the funding formula on an 8-hour basis, but settle it in smaller intervals (such as hourly payments). In that case, traders pay or receive a proportional share each interval.
At each funding timestamp:
Traders holding positions pay or receive funding based on:
Position size
Reference price (often an oracle price)
Funding rate for that interval
Funding formula
A common structure for funding is:
Funding Rate = Premium Component + Adjustment Term
Where the adjustment term may include:
A fixed interest rate component
A clamp (cap) on how much the adjustment can affect the final rate
This clamp is used to prevent the formula from producing unstable funding values from short-lived price dislocations.
In many systems, the premium is sampled frequently (for example, every few seconds) and averaged over the funding interval.
Premium calculation
Rather than using the last traded price, many platforms calculate premium using impact prices and an oracle price.
Key ideas
Oracle price: a fair reference price derived from external spot markets
Impact bid / ask price: estimated average execution price for a standardized order size on the platform’s order book
This approach helps measure whether the market is truly trading at a premium/discount under realistic execution conditions, not just a single visible quote.
A simplified form is:
Premium ≈ (Perp fair/impact price - Oracle price) / Oracle price
If the premium is positive, funding tends to favor shorts (longs pay).
If the premium is negative, funding tends to favor longs (shorts pay).
Funding caps
Many platforms cap funding rates to prevent extreme payments during volatile conditions.
Funding caps are designed to:
Limit sudden funding spikes
Improve risk management
Prevent funding from becoming the dominant source of PnL over short periods
Caps may be applied per interval (for example, per hour) and can vary by platform.
How funding payments are applied
At the funding interval, the payment is generally:
Funding Payment = Position Notional × Funding Rate
Where position notional is usually derived from: Position size × reference price (often an oracle price)
Important detail: some platforms use the oracle/reference price (not mark price) when converting position size into notional for funding calculations.
Practical notes for traders
Funding is not a trading fee; it is a payment between longs and shorts
Funding can materially affect PnL for positions held over long periods
High positive funding increases the cost of staying long
High negative funding increases the cost of staying short
Funding rates can change quickly during crowded or volatile markets
If you hold positions overnight or for multiple days, funding should be part of your trade planning.
Example funding calculation
Below is a simplified example to illustrate how funding is calculated.
Assumptions
Funding interval: 1 hour
Fixed interest component: 0.01% (using an 8-hour convention in the base formula)
Oracle (spot reference) price: $10,000
Perpetual market is trading at a premium
Position: Long 10 contracts (1 BTC per contract)
Step 1: Calculate premium
If the impact bid (or fair perp execution price) is $10,100 and the oracle price is $10,000:
Premium = (10,100 - 10,000) / 10,000 = 1.00%
So the perp is trading at a 1% premium to spot.
Step 2: Apply the funding adjustment
A funding formula may include a capped adjustment term that combines interest and premium.
In this example, the adjustment is clamped to a maximum size, so the full premium is partially offset but not fully canceled.
Step 3: Compute funding rate
Using the formula structure:
Funding Rate = Premium + Clamped Adjustment
This yields a final funding rate of:
Funding Rate = 0.95% (for the formula interval basis shown)
If the platform settles hourly while the formula is expressed on an 8-hour basis, the actual hourly payment would be the appropriate fraction of that rate.
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