What Role Does Open Interest Play in Determining the Funding Rate?

Open interest, which is the total number of outstanding or unclosed contracts, indicates the market's directional bias and is a component in the funding rate calculation. High open interest in one direction (e.g. long) relative to the other often leads to a higher absolute funding rate.

This is because a large imbalance of long or short positions contributes to the divergence between the contract price and the index price.