Funding Rate

What is Funding Rate? ⏲

Funding Rate Calculation 🎯

The Funding Rate is a mechanism used in cryptocurrency perpetual futures to ensure that the contract price remains aligned with the underlying asset price. It acts as a periodic payment between long and short positions, incentivizing traders to maintain price equilibrium and prevent significant deviations.

Premium Index (( P )) ⚙

The Premium Index (( P )) measures the difference between the perpetual contract price and the underlying asset price.

$$P = \frac{\max(0, IBP - \text{Price Index}) - \max(0, \text{Price Index} - IAP)}{\text{Price Index}}$$

• IBP: Impact Bid Price

• IAP: Impact Ask Price

Funding Rate Formula 📻

The Funding Rate is calculated using the Premium Index:

$$fr = \bar{P} + \text{clamp}\left( \gamma - \bar{P}, -0.05\%, 0.05\% \right)$$

$$fr_{\text{capped}} = \text{clamp}\left( fr, -0.05\%, 0.05\% \right)$$

• Clamp Function: Restricts the Funding Rate between -0.05% and 0.05% to avoid extreme values.

Financial Impact 🌐

The Funding Rate affects your trading position based on the size of your position, the rate itself, and the duration you hold the position.

$$\text{Impact} = \Delta \times fr \times \frac{T}{\text{Funding Period}}$$

Where:

• Delta : Position Notional (e.g., $10,000)

• fr : Funding Rate per period (e.g., 0.03%)

• T: Total Holding Time (e.g., 24 hours)

• Funding Period: Time between funding payments (typically 8 hours)

Example: Holding a $10,000 position for 24 hours with a Funding Rate of 0.03% over 3 funding periods results in an impact of $9.

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