Funding Rates
Overview
Funding rates are the mechanism that anchors perpetual contract prices to spot market prices without requiring expiration dates. They create periodic payments between long and short position holders to maintain price alignment.
Key Concepts:
Funding Rate: Periodic payment rate between longs and shorts
Mark Price: Fair price from external oracles
Funding Interval: Payment occurs every 8 hours
Premium/Discount: Difference between perpetual and spot price
Funding Payment: Actual dollar amount exchanged
Purpose
Funding rates solve a fundamental problem with perpetual futures:
Traditional Futures:
Expire and settle at specific dates
Price converges to spot at expiration
Require rolling to maintain exposure
Have settlement risk
Perpetual Futures:
Never expire
Need mechanism to anchor to spot price
Funding rates create economic incentive
Continuous price alignment
How It Works:
When perpetual > spot: Longs pay shorts (positive funding)
When perpetual < spot: Shorts pay longs (negative funding)
Incentivizes arbitrage to close price gap
Maintains price parity without expiration
Funding Rate Calculation
Basic Formula
Components:
Perpetual Price: Last traded price on Frontier Chain
Mark Price: Fair price from external oracle
Premium: Perpetual > Mark (positive funding)
Discount: Perpetual < Mark (negative funding)
Direction:
Typical Ranges
Normal Market Conditions:
-0.01% to +0.01% per 8 hours
-0.03% to +0.03% daily (3 intervals)
-10% to +10% annualized
Volatile Markets:
-0.05% to +0.05% per 8 hours
-0.15% to +0.15% daily
-50% to +50% annualized
Extreme Conditions:
-0.1% to +0.1% per 8 hours
-0.3% to +0.3% daily
-100% to +100% annualized
Typically during major events
Historical Examples:
Bull markets: Often +0.01% to +0.05% (longs eager to pay)
Bear markets: Often -0.01% to -0.03% (shorts dominate)
Neutral: Oscillates around 0%
Extreme events: Can exceed ±0.1% temporarily
Funding Payment
Payment Calculation
Variables:
Position Size: Quantity of contracts held
Mark Price: Fair oracle price at funding time
Funding Rate: Current 8-hour rate
Sign: Positive = you pay, Negative = you receive
Example: Positive Funding
When perpetual trades above spot (bullish sentiment):
Interpretation:
Market is bullish
Longs willing to pay premium
You pay for holding long position
Shorts receive payment
Example: Negative Funding
When perpetual trades below spot (bearish sentiment):
Interpretation:
Market is bearish
Shorts willing to pay premium
You receive payment for holding long
Longs earn from shorts
Example: Large Position
Note: Larger positions mean larger funding payments/receipts
Funding Impact
On PnL
Funding payments directly affect position profitability:
Cumulative Tracking:
Each funding payment recorded
Tracked per position
Affects realized PnL when position closed
Visible in position metrics
Example:
On Holding Cost
Funding acts as a holding cost or income:
Positive Funding (Longs Pay):
Cost to hold long positions
Similar to borrowing cost
Reduces long position profitability
Can make profitable trades unprofitable
Negative Funding (Shorts Pay):
Cost to hold short positions
Penalizes bearish speculation
Reduces short position profitability
Longs earn "interest"
Break-Even Calculation:
Trading Implications
Strategy Adjustments
High Positive Funding (+0.03% to +0.1%):
Consider shorting the perpetual
Or buying spot and shorting perpetual (cash-and-carry)
Longs are paying premium
Market likely overbought
High Negative Funding (-0.03% to -0.1%):
Consider longing the perpetual
Or selling spot and longing perpetual (reverse cash-and-carry)
Shorts are paying premium
Market likely oversold
Near-Zero Funding (-0.01% to +0.01%):
Neutral market sentiment
Funding cost minimal
Trade based on price action
No funding arbitrage opportunity
Funding Arbitrage
Take advantage of funding rate inefficiencies:
Cash-and-Carry (Positive Funding):
Reverse Cash-and-Carry (Negative Funding):
Hold Time Decisions
Factor funding into position duration:
Short-Term Trades (< 24 hours):
Funding less important (0-3 payments)
Focus on price action
May ignore small funding rates
Scalping not affected much
Medium-Term Trades (1-7 days):
Funding becomes significant
Factor into profit targets
Monitor funding rate changes
3-21 funding payments
Long-Term Positions (> 7 days):
Funding is critical
Can accumulate significant costs/income
May outweigh price movements
21+ funding payments
Example:
Funding Farming
Strategy
Earn funding rates as a primary profit source:
Concept:
Hold position purely to collect funding
Price risk is secondary or hedged
Targets high funding rates
Often combined with hedging
Execution:
Risks:
Funding rates can change
Price movements may exceed funding income
Liquidation risk if not hedged
Requires active monitoring
Example Trade
Funding Rate Monitoring
Key Metrics to Track
Current Funding Rate:
8-hour rate being applied now
Determines next payment
Updated continuously
Typically displayed as % or bps
Next Funding Time:
Countdown to next payment
Standard: Every 8 hours (00:00, 08:00, 16:00 UTC)
Some exchanges vary
Plan entries/exits around this
Funding Rate History:
7-day average
30-day average
Historical extremes
Identify trends
Predicted Funding:
Forward-looking estimate
Based on current premium/discount
May differ from final rate
Use for planning
Interpretation
Rising Funding Rate:
Increasing bullish sentiment
Longs willing to pay more
May indicate over-leveraged longs
Potential for long squeeze
Falling Funding Rate:
Increasing bearish sentiment
Shorts willing to pay more
May indicate over-leveraged shorts
Potential for short squeeze
Funding Rate Extremes:
+0.1% or higher: Extreme bullish leverage
-0.1% or lower: Extreme bearish leverage
Often precedes volatility
Mean reversion likely
Funding Rate Divergence:
Different rates across markets
Arbitrage opportunity
Check for trading restrictions
Consider execution costs
Mark Price vs Last Price
Why Mark Price Matters
Last Price:
Latest trade on Frontier Chain
Can be manipulated short-term
Not used for liquidations
Used for entry/exit
Mark Price:
Based on external oracle data
Weighted average of spot exchanges
Used for funding calculation
Used for liquidation determination
Prevents manipulation
Protection:
Prevents fake liquidations
Fair funding calculations
Smooth price discovery
Reduces manipulation risk
Funding Rate Formula Details
Complete Calculation
Simplified for Most Cases:
Advanced Considerations
Funding Rate Caps
Most exchanges cap funding rates:
Typical Caps:
Frontier Chain: ±0.75% per 8 hours
Prevents extreme rates
Protects both sides
Maintains market stability
Implications:
Rates can't go infinite
Basis spread may exceed cap
Arbitrage opportunities if capped
System remains stable
Funding vs Borrowing Costs
Compare to traditional margin:
Traditional Margin Trading:
Borrow at fixed rate (e.g., 5% annually)
Pay regardless of market direction
Rate set by platform
Predictable cost
Perpetual Funding:
Rate varies with market
Can be positive or negative
Direction matters
Unpredictable cost/income
When to Use Each:
Predictable long hold: Traditional margin may be cheaper
Short-term trading: Perpetuals more flexible
Want to earn funding: Perpetuals offer income potential
Avoid funding risk: Traditional margin
Key Takeaways
Funding Rate Fundamentals:
Anchors perpetual price to spot without expiration
Positive funding: Longs pay shorts (bullish market)
Negative funding: Shorts pay longs (bearish market)
Payment every 8 hours based on position size
Trading Impact:
Adds holding cost or income to positions
Can significantly affect profitability over time
Factor into break-even calculations
Consider in position duration decisions
Strategic Uses:
Funding arbitrage (cash-and-carry)
Funding farming during extremes
Market sentiment indicator
Risk management tool
Monitoring:
Track current and historical rates
Compare across markets
Watch for extremes (±0.05%+)
Plan trades around funding times
Next Steps:
Margin & LeverageLiquidation SystemPosition ManagementLast updated