Funding Fees: The Periodic Settlement Mechanism in Perpetual Contracts
Funding fees are periodically settled between long and short positions in perpetual contracts to narrow the deviation between the contract price and the spot price. The direction of the fee depends on whether the funding rate is positive or negative and also affects holding costs.
What Are Funding Fees?
A funding fee is a fee periodically paid between holders of long and short positions in the perpetual contract market; it is not always borne by one particular side. The payment direction and amount depend on the funding rate. The mechanism encourages the contract price to move closer to the spot price of the underlying asset, preventing a substantial long-term deviation between the two.
How Positive and Negative Rates Affect Payments
When the contract price is higher than the spot price and the funding rate is positive, long position holders typically pay the fee to short position holders. When the contract price is lower than the spot price and the funding rate is negative, short position holders pay long position holders. This mechanism drives prices back toward each other by changing the cost of holding positions.
Calculation Basis and Practical Impact
Platforms typically calculate the funding rate based on the interest rate and premium index. The specific formula and settlement interval may vary; this material uses an update once every 8 hour as an example. Funding fees increase the holding costs of the paying party and become income for the receiving party, so position holders should verify the platform rules and estimated rate in advance.
How to Interpret Funding Rates Correctly
A positive funding rate is often accompanied by relatively strong demand from the long side, while a negative funding rate is often accompanied by relatively strong demand from the short side. It can help gauge market sentiment, but it is not a price prediction tool and cannot, by itself, constitute a basis for trading. Interpretation should also distinguish between the current rate, the estimated rate, and the actual settlement result.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/funding-fees
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