What is the funding fee for a perpetual contract

The funding fee is a payment exchanged between perpetual contract parties, based on interest rates, price discrepancies, and funding intervals, ensuring price alignment with the underlying asset's spot price.

Oct 24, 2024 at 07:33 am

What is the funding fee for a perpetual contract?

A funding fee is a payment made between two parties in a perpetual contract. The party who has a positive position (i.e., they are long) pays the party who has a negative position (i.e., they are short). The purpose of the funding fee is to keep the price of the perpetual contract in line with the spot price of the underlying asset.

The funding fee is calculated based on the following formula:

Funding fee = (Interest rate * (Index price - Mark price)) / Funding interval

where:

• Interest rate is the annualized interest rate on the underlying asset
• Index price is the current price of the underlying asset
• Mark price is the current price of the perpetual contract
• Funding interval is the time between each funding payment

The funding fee is typically paid every 8 hours. The size of the funding fee can vary depending on the interest rate, the difference between the index price and the mark price, and the funding interval.

How does the funding fee work?

The funding fee is paid by the party who has a positive position to the party who has a negative position. This is because the party who is long is borrowing the underlying asset from the party who is short. The funding fee is used to compensate the party who is short for the risk of lending the underlying asset.

The size of the funding fee is determined by the following factors:

• Interest rate: The interest rate is the annualized interest rate on the underlying asset. The higher the interest rate, the higher the funding fee. This is because the party who is long is borrowing more money from the party who is short.
• Difference between the index price and the mark price: The difference between the index price and the mark price is the difference between the current price of the underlying asset and the current price of the perpetual contract. The larger the difference, the higher the funding fee. This is because the party who is long is taking on more risk by being long the underlying asset.
• Funding interval: The funding interval is the time between each funding payment. The shorter the funding interval, the higher the funding fee. This is because the party who is long is borrowing the underlying asset for a shorter period of time.

Conclusion

The funding fee is an important part of the perpetual contract market. It helps to keep the price of the perpetual contract in line with the spot price of the underlying asset. The size of the funding fee is determined by a number of factors, including the interest rate, the difference between the index price and the mark price, and the funding interval.