How Does the “Funding Rate” Mechanism Work?
The Funding Rate is a periodic payment between traders of perpetual swap contracts, designed to keep the contract price close to the spot price of the underlying asset. If the perpetual price is higher than the spot price, long position holders pay short position holders (positive funding rate).
If lower, shorts pay longs (negative rate). This acts as an arbitrage incentive.
Glossar
Short Position Holders
Position ⎊ Short position holders, within cryptocurrency derivatives markets, represent entities strategically betting on a decline in the price of an underlying asset.
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.
Contract Price
Agreement ⎊ Within cryptocurrency derivatives and options trading, the Agreement represents the legally binding articulation of the price stipulated for a future transaction, reflecting a convergence of expectations between counterparties.
Long Position Holders
Position ⎊ Long position holders within cryptocurrency derivatives represent entities anticipating an upward price movement of an underlying asset, securing exposure through instruments like perpetual futures, options, or leveraged tokens.
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.