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The funding rate is one of the core mechanisms of perpetual futures, designed to maintain balance between long and short positions and keep perpetual futures prices as close as possible to spot market prices.
Unlike delivery futures, perpetual futures do not have an expiration date. Therefore, a funding rate mechanism is required to maintain market price stability.
1. What Makes Up the Funding Rate?
The funding rate generally consists of two components:
Interest Rate
The interest rate primarily reflects the difference in borrowing costs between the base asset and the quote asset.
Its calculation formula is generally as follows:
Where:
Premium Index
When the perpetual futures price trades at a significant premium or discount relative to the mark price, the system adjusts the funding rate for the next settlement cycle using the Premium Index.
The Premium Index is used to measure the degree of deviation between perpetual futures prices and spot market prices.
Its calculation is generally based on the following market data:
2. Funding Rate Formula
The funding rate is generally calculated using the following formula:
Where:
In the current funding rate model, the buffer limit parameter (cap) used in the Clamp mechanism is generally set at 0.05%.
The Clamp mechanism is used to limit fluctuations in the funding rate, thereby reducing market risks during extreme market conditions. When I − P remains within the restricted range, the funding rate will generally stay closer to the interest rate level, which generally indicates relatively stable market conditions.
3. Why Are Funding Rate Limits Necessary?
To reduce market risks during extreme market conditions, funding rates are generally subject to certain limits.
The primary purposes of funding rate limits include:
4. Funding Rate Limit Mechanism
Funding rates are generally subject to limits on both their absolute value and rate of change.
For example:
Specific limits are generally determined by factors such as:
5. How Do Funding Rates Affect Trading?
Under high funding rate conditions, long-term holding costs may increase significantly, potentially reducing overall profitability.
Users are advised to continuously monitor the following information:
Risk Warning: Funding rates dynamically adjust based on market volatility and long/short sentiment. Under high leverage or extreme market conditions, funding costs may increase significantly. Users are advised to manage positions and leverage appropriately.