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Funding Rate

Funding Rate is a mechanism that balances long and short positions in the market, ensuring equilibrium between buyers and sellers.

What is Funding Rate?​

Funding Rate is a rate that is charged or paid between market participants depending on position imbalance:

  • Positive rate → Long positions pay Short positions
  • Negative rate → Short positions pay Long positions

Why Funding Rate?​

  1. Market Balancing: The rate incentivizes participants to open positions in the direction of the minority
  2. Risk Compensation: The side with fewer positions receives compensation for risk
  3. Synchronization: Index price approaches market price

How is Funding Rate Calculated?​

Funding Rate is updated daily and calculated based on:

1. Skew (Position Imbalance)​

skew = totalLongValue - totalShortValue

where:

  • totalLongValue — total value of all open long positions
  • totalShortValue — total value of all open short positions

2. Normalizing Skew​

normalizedSkew = max(-1, min(1, skew / SKEW_SCALE))

where SKEW_SCALE = 10,000,000 USD — scaling coefficient for smooth changes

3. Rate Change​

The rate changes proportionally to imbalance and time:

deltaRate = normalizedSkew × MAX_FUNDING_VELOCITY × daysElapsed

where:

  • MAX_FUNDING_VELOCITY = 0.01 (1% per day) — maximum rate change velocity
  • daysElapsed — number of days since last update

4. New Rate​

newRate = currentRate + deltaRate

5. Decay​

If positions are balanced (|normalizedSkew| < 0.0001), the rate decays toward zero:

decayRate = |currentRate| > 0.0001 ? 0.5 : 0.1
decayFactor = decayRate ^ daysElapsed
newRate = newRate × decayFactor

Special Cases​

No Open Positions​

If totalOI = 0 (no open positions), then fundingRate = 0

Balanced Market​

If long and short positions are approximately equal, the rate decays toward zero

Examples​

Example 1: More Long Positions​

  • Long positions: $15,000,000
  • Short positions: $5,000,000
  • Skew: $10,000,000
  • Normalized Skew: 1.0 (maximum)
  • Rate change: +1% per day

Result: Longs pay Shorts

Example 2: More Short Positions​

  • Long positions: $5,000,000
  • Short positions: $15,000,000
  • Skew: -$10,000,000
  • Normalized Skew: -1.0 (minimum)
  • Rate change: -1% per day

Result: Shorts pay Longs

Example 3: Balanced Market​

  • Long positions: $10,000,000
  • Short positions: $10,000,000
  • Skew: $0
  • Normalized Skew: 0

Result: Rate decays toward zero

How is Funding Paid?​

Funding fee is calculated as follows:

Funding Fee = Position Size × Funding Rate × Days Held

where:

  • Position Size = quantity_sqm × current_price (position size in USD)
  • Funding Rate — current funding rate
  • Days Held — number of days the position was open

Payment Direction​

  • Long position:

    • If fundingRate > 0 → pays (negative fee)
    • If fundingRate < 0 → receives (positive fee)

  • Short position:

    • If fundingRate > 0 → receives (positive fee)
    • If fundingRate < 0 → pays (negative fee)

Update Frequency​

Funding Rate is updated:

  • Daily during price updates
  • On each position open/close (recalculation based on new metrics)

Important Notes​

  1. Maximum change velocity: 1% per day (to prevent sharp spikes)
  2. Smoothness: Large SKEW_SCALE ensures smooth rate changes
  3. Automatic balancing: Mechanism automatically incentivizes market balance