How Do Exchanges Prevent Manipulation of the Funding Rate Itself?
Exchanges employ several mechanisms to prevent funding rate manipulation. The premium component is often calculated using a time-weighted average price (TWAP) of the spread between the future and spot price over the funding period, which smoothens out short-term price spikes.
The index price used for the spot reference is also a composite, derived from multiple trusted spot exchanges, which prevents manipulation from a single source. Additionally, exchanges set caps and floors on the funding rate to limit its value within a reasonable range, preventing extreme rates from destabilizing the market.
Glossar
Funding Rate
Mechanism ⎊ Funding Rate represents a periodic payment exchanged between traders holding opposing positions in perpetual futures contracts, establishing an equilibrium between contract prices and the underlying spot market.
Spot Price
Valuation ⎊ The spot price in cryptocurrency, options, and derivatives represents the current market-clearing price for immediate delivery of the underlying asset, functioning as a fundamental benchmark for pricing more complex instruments.
Composite Index Price
Price ⎊ A composite index price, within cryptocurrency derivatives, represents a calculated value derived from aggregating the prices of multiple underlying assets or contracts.
Premium Component
Component ⎊ Within cryptocurrency derivatives and financial engineering, a premium component signifies the portion of an option's price exceeding the theoretical intrinsic value, reflecting market expectations regarding future volatility and potential price movements.