How Is a TWAP Used in Calculating the ‘Funding Rate’ of a Perpetual Swap?
The funding rate in a perpetual swap is a periodic payment between the long and short sides, designed to keep the contract's price (mark price) anchored to the underlying asset's spot price (index price). A Time-Weighted Average Price (TWAP) of the index price is often used to calculate the funding rate to prevent temporary price spikes from causing wild swings in the payment.
This ensures the rate is based on a stable, fair representation of the underlying market.
Glossar
Perpetual Swap
Mechanism ⎊ Perpetual swaps, within cryptocurrency markets, represent agreements to exchange cash flows based on the difference between a cryptocurrency’s current price and a user-defined price, perpetually, without an expiration date.
Index Price
Derivation ⎊ The Index Price in cryptocurrency derivatives represents a synthesized, real-time valuation of an underlying asset, typically a cryptocurrency, calculated from aggregated price data across multiple exchanges.
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.