Funding Rate

Funding

Funding rates are calculated hourly for each market and collateral asset based on the real-time open interest imbalance. For example, if there are more longs than shorts on the BTC-USD market in USDC collateral, USDC-margined long positions will pay USDC-margined shorts on that market, in USDC. Funding is implicitly added or subtracted to a position's unrealized profit or loss. Each market has a Funding Factor (FF), which is the yearly rate at which longs (or shorts) pay shorts (or longs) if open interest were completely skewed toward longs (or shorts).The hourly funding rate for a given collateral asset on a given market is equal to:

The mathematical formula for calculating the funding rate in perpetual futures contracts, such as those found in cryptocurrency derivatives trading, is as follows:

Funding Rate = Clamp(Interest Rate - Premium Index, -Cap, Cap)

Here's a breakdown of the components of this formula:

• Interest Rate: The interest rate is typically an annualized rate and represents the cost of holding the position for a specified period. It is often provided by the exchange and can vary.

• Premium Index: The premium index is the difference between the current price of the perpetual contract and the spot price of the underlying asset. It represents the market's sentiment regarding the contract's future price compared to the actual spot price.

• Cap: The cap is an upper limit imposed on the funding rate to prevent extreme funding rates that could result from market volatility. It's a safeguard to control funding payments.

The funding rate calculation ensures that the funding rate remains within the specified range A negative funding rate indicates that shorts pay longs, while a positive funding rate indicates that longs pay shorts.