What Is the Role of the “Funding Rate” in Perpetual Cryptocurrency Futures Contracts?
The funding rate is a periodic payment exchanged between the long and short parties of a perpetual futures contract. Its primary role is to keep the perpetual contract's price anchored to the underlying spot price, mimicking convergence without an expiration date.
If the contract trades at a premium (above spot), longs pay shorts; if at a discount (below spot), shorts pay longs. This mechanism controls the basis.
Glossar
Premium
Price ⎊ In the context of options trading, the premium represents the price paid by the option buyer to the seller for the rights conveyed by the contract.
Discount
Valuation ⎊ In financial derivatives, a discount refers to a situation where a security trades below its theoretical or intrinsic value.
Perpetual Futures
Structure ⎊ Perpetual Futures are a type of derivative contract, native to the cryptocurrency market, that allows traders to speculate on the future price of an underlying asset without a fixed expiration date.
Periodic Payment
Settlement ⎊ Periodic payment structures within cryptocurrency derivatives, particularly options and perpetual swaps, represent scheduled cash flows tied to underlying contract performance, differing from traditional finance through decentralized execution and potential for fractional payments.
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.