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Funding Rate Calculation

Funding Rate is a financing rate that compensates for the imbalance between long and short positions in the market.

Formula​

new_funding_rate=current_funding_rate+delta_rate\text{new\_funding\_rate} = \text{current\_funding\_rate} + \text{delta\_rate}

where:

delta_rate=normalized_skew×MAX_FUNDING_VELOCITY×days_elapsed\text{delta\_rate} = \text{normalized\_skew} \times \text{MAX\_FUNDING\_VELOCITY} \times \text{days\_elapsed}

and:

normalized_skew=clamp(skewSKEW_SCALE,−1,1)\text{normalized\_skew} = \text{clamp}\left(\frac{\text{skew}}{\text{SKEW\_SCALE}}, -1, 1\right)

Parameters​

ParameterValueDescription
current_funding_rateVariableCurrent funding rate
skewLong OI - Short OIPosition imbalance in USD
SKEW_SCALE10,000,000 USDScaling coefficient
MAX_FUNDING_VELOCITY0.01 (1% per day)Maximum rate of change for funding rate
days_elapsedVariableNumber of days since last update

Explanation​

Normalized Skew​

Normalized skew limits the impact of large imbalances:

normalized_skew=clamp(skewSKEW_SCALE,−1,1)\text{normalized\_skew} = \text{clamp}\left(\frac{\text{skew}}{\text{SKEW\_SCALE}}, -1, 1\right)

This means:

  • If skew>SKEW_SCALE\text{skew} > \text{SKEW\_SCALE}, then normalized_skew=1\text{normalized\_skew} = 1
  • If skew<−SKEW_SCALE\text{skew} < -\text{SKEW\_SCALE}, then normalized_skew=−1\text{normalized\_skew} = -1
  • Otherwise normalized_skew=skewSKEW_SCALE\text{normalized\_skew} = \frac{\text{skew}}{\text{SKEW\_SCALE}}

Delta Rate​

Delta rate shows the change in funding rate over a period:

delta_rate=normalized_skew×MAX_FUNDING_VELOCITY×days_elapsed\text{delta\_rate} = \text{normalized\_skew} \times \text{MAX\_FUNDING\_VELOCITY} \times \text{days\_elapsed}

The maximum change per day is 1% (MAX_FUNDING_VELOCITY\text{MAX\_FUNDING\_VELOCITY}).

New Funding Rate​

The new funding rate is calculated as the sum of the current rate and the change:

new_funding_rate=current_funding_rate+delta_rate\text{new\_funding\_rate} = \text{current\_funding\_rate} + \text{delta\_rate}

Calculation Examples​

Example 1: Long position dominance​

Conditions:

  • Current Funding Rate = 0.02 (2%)
  • Long OI = $8,000,000
  • Short OI = $3,000,000
  • 1 day elapsed

Calculation:

skew = $8,000,000 - $3,000,000 = $5,000,000
normalized_skew = $5,000,000 / $10,000,000 = 0.5
delta_rate = 0.5 × 0.01 × 1 = 0.005
new_funding_rate = 0.02 + 0.005 = 0.025 (2.5%)

Example 2: Short position dominance​

Conditions:

  • Current Funding Rate = 0.01 (1%)
  • Long OI = $2,000,000
  • Short OI = $7,000,000
  • 2 days elapsed

Calculation:

skew = $2,000,000 - $7,000,000 = -$5,000,000
normalized_skew = -$5,000,000 / $10,000,000 = -0.5
delta_rate = -0.5 × 0.01 × 2 = -0.01
new_funding_rate = 0.01 - 0.01 = 0.0 (0%)

Example 3: Maximum imbalance​

Conditions:

  • Current Funding Rate = 0.0 (0%)
  • Long OI = $15,000,000
  • Short OI = $1,000,000
  • 1 day elapsed

Calculation:

skew = $15,000,000 - $1,000,000 = $14,000,000
normalized_skew = clamp($14,000,000 / $10,000,000, -1, 1) = 1.0
delta_rate = 1.0 × 0.01 × 1 = 0.01
new_funding_rate = 0.0 + 0.01 = 0.01 (1%)

Interpretation​

  • Positive Funding Rate: more long positions в†’ traders with long positions pay funding to traders with short positions
  • Negative Funding Rate: more short positions в†’ traders with short positions pay funding to traders with long positions
  • Zero Funding Rate: balance between long and short positions

Update​

Funding Rate is updated:

  • When opening/closing positions
  • Daily as part of periodic updates