Funding Rate

What is the Funding Rate?

Funding rates are periodic payments made to either long or short traders, calculated based on the difference between the perpetual contract prices and spot prices. When the market is bullish, the funding rate is positive and tends to rise over time. In these situations, traders long on a perpetual contract will pay a funding fee to traders on the opposing side. Conversely, the funding rate will be negative when the market is bearish, where traders short on a perpetual contract will pay a funding fee to long traders.

Why is the Funding Rate important?

The funding rate is primarily used to force the convergence of prices between the perpetual contract and the underlying asset. Unlike traditional futures, perpetual contracts have no expiration date. Thus, traders can hold positions to perpetuity unless he gets liquidated. As a result, trading perpetual contracts are very similar to spot trading pairs. As such, crypto exchanges created a mechanism to ensure that perpetual contract prices correspond to the index. This is known as the Funding Rate.

How Often The Funding interval?

Funding payments occur every 8 hours at most exchange, some every 4 hours or 1 hours.

In the event of extreme market volatility, Exchange reserves the right to update the funding rate interval of a perpetual contract that differs from the default 8-hour funding interval.

What Determines the Funding Rate?

There may be differences in the calculation of each exchange, but the Premium Index & Interest Rate is the the most important data to determine the funding Rate.

example:

Okx: Funding rate calculated between 00:00 UTC-08:00 UTC will be exchanged at 16:00 UTC;

Binance: Funding rate calculated between 00:00 UTC-08:00 UTC will be exchanged at 00:00 UTC;

How to calculate Funding Fee ?

Funding fee = Position value * Funding rate

example:

Person A Hold 100 Per BTCUSD perpetual，BTCUSD perpetual 1 Per =100USD，Price at this time is 10,000 USDT，Funding Rate is 0.01％。

Position value = 100*100/10,000 = 1 BTC

Funding fee = 1 BTC x 0.01% = 0.0001 BTC