What Is the Potential Impact of a Negative Funding Rate on a Stablecoin’s Lending Rate?
A negative funding rate means short position holders are paying long position holders, indicating that the market is overly bearish and short demand is high. To execute these short positions, traders must borrow the underlying asset (or the stablecoin if it's the base currency for the loan).
This high demand for borrowing the stablecoin for shorting purposes can put upward pressure on the stablecoin's lending rate in the broader DeFi and centralized lending markets, as supply is strained to meet the high borrowing demand.
Glossar
Negative Funding
Phenomenon ⎊ Negative funding is a market phenomenon specific to cryptocurrency perpetual futures contracts, occurring when the contract's price trades below the underlying spot index price, a condition known as backwardation.
Negative Funding Rate
Condition ⎊ Negative Funding Rate occurs in perpetual swap contracts when the annualized rate paid by short position holders to long position holders becomes negative, signaling that the market is predominantly net short.
Lending Rate
Definition ⎊ The lending rate is the interest expense incurred when borrowing an asset to execute a short position or leverage a trade.