> For the complete documentation index, see [llms.txt](https://docs.tryliquid.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.tryliquid.xyz/trading/funding-rates.md). # Funding Rates Funding rates keep perpetual futures prices anchored to the underlying market. Learn how funding is calculated, who pays, and how it affects your PnL on Liquid. ### Overview Funding rates are the mechanism perpetual futures use to keep the contract price aligned with the underlying spot or reference price. Because perpetual contracts never expire, funding anchors the perp price 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 Liquid does not collect funding payments. Funding is a transfer between market participants, separate from [trading fees](/trading/fees.md). ### Why Funding Exists If a perpetual contract is trading above the reference price, long positions are usually crowded and funding tends to be positive. Longs pay shorts, which encourages more short interest and brings the perp price back toward the reference. If a perpetual contract is trading below the reference price, funding tends to be negative. Shorts pay longs, encouraging more buying and moving the contract price back up. ### What Determines the Funding Rate Funding is generally made up of two components: 1. **Interest component.** A fixed or predetermined rate reflecting the cost difference between holding quote currency (USD or stablecoins) and holding the underlying asset. 2. **Premium component.** Whether the perpetual is trading above or below the oracle price. A perp trading above oracle has a positive premium; below oracle, a negative premium. The premium is calculated using fair pricing (oracle prices and order-book impact prices) rather than a single last-traded price. ### Funding Frequency Funding is calculated on a recurring schedule. Many markets express the rate on an 8-hour basis but settle it hourly, so traders pay or receive a proportional share each hour. At each funding timestamp, traders holding positions pay or receive funding based on position size, the reference (oracle) price, and the funding rate for that interval. The current funding rate and the countdown to the next payment are shown on every perpetual market page in Liquid, and Co-Invest can report it on request ("what's the funding rate on BTC right now?"). ### Funding Formula A common structure is: `Funding Rate = Premium Component + Adjustment Term` The adjustment term may include a fixed interest rate component and a clamp (cap) on how much the adjustment can affect the final rate, which prevents unstable funding values from short-lived price dislocations. The premium is sampled frequently and averaged over the funding interval. `Premium ≈ (Perp impact price − Oracle price) / Oracle price` ### Funding Caps Funding rates are capped to prevent extreme payments during volatile conditions. Caps limit sudden spikes, improve risk management, and prevent funding from becoming the dominant source of PnL over short periods. ### How Funding Payments Are Applied `Funding Payment = Position Notional × Funding Rate` Position notional is derived from position size × oracle price. ### 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 **Assumptions** * Funding interval: 1 hour * Fixed interest component: 0.01% (8-hour convention) * Oracle price: $10,000 * Position: long 10 BTC **Step 1: Calculate premium.** If the impact price is $10,100 and the oracle price is $10,000, the premium is (10,100 − 10,000) / 10,000 = 1.00%. **Step 2: Apply the adjustment.** The adjustment term (interest minus premium) is clamped, so the full premium is partially offset but not fully canceled. **Step 3: Compute the rate.** Funding Rate = Premium + Clamped Adjustment = 0.95% on the 8-hour basis. If funding settles hourly, the hourly payment is one-eighth of that rate, applied to the position's notional value.