What is a funding rate?

Why perpetuals need funding at all

A traditional futures contract has an expiry date. As that date approaches, the contract price converges on the spot price, because on expiry the two settle against each other. That convergence is automatic — arbitrageurs enforce it, and the calendar guarantees it.

A perpetual future has no expiry. Nothing forces its price back toward spot, so without an additional mechanism it could drift indefinitely. Funding is that mechanism. Instead of a settlement date, the contract applies a small recurring payment that makes holding the more crowded side progressively more expensive.

The effect is economic rather than mechanical. Funding does not move the price directly; it changes the cost of holding a position, which changes what traders are willing to pay, which moves the price.

Who pays whom

The direction follows the sign of the rate, and the logic is always the same: whichever side is crowded pays the other.

Positive funding

The perpetual is trading above spot, meaning demand for long exposure exceeds demand for short. Longs pay shorts. Holding a long costs money each interval; holding a short earns it.

Negative funding

The perpetual is trading below spot, meaning shorts are crowded. Shorts pay longs. This is less common in crypto but appears during sharp sell-offs and around heavily shorted assets.

How the payment is calculated

Funding is charged on position size, not on margin. A trader holding a position worth $100,000 at a funding rate of 0.01% pays or receives $10 for that interval, regardless of whether the position was opened with $5,000 or $50,000 of collateral.

This is the part that surprises people using high leverage. Leverage does not change the funding paid in absolute terms, but it changes it enormously relative to the collateral at risk. The same $10 is 0.2% of a $5,000 margin balance and 0.02% of a $50,000 one.

Intervals vary by venue. Eight hours is the most common, which means three payments a day, but several perpetual DEXs settle hourly. A rate quoted without its interval is close to meaningless — the same nominal number is eight times larger per day on an hourly venue.

Reading the annualised figure

Because the raw numbers are small, funding is usually annualised for comparison. A rate of 0.01% every eight hours is 0.03% per day, which compounds to roughly 11% a year. That framing makes the cost of a long-held position obvious in a way the raw figure does not.

Annualised figures assume the rate persists, which it rarely does. Funding is a snapshot of positioning, and positioning changes. Treat an annualised rate as a description of current conditions, not a forecast.

What funding tells you about the market

Sustained high positive funding means leveraged long demand is heavy. That is not automatically bearish, but it does mean a lot of positions are paying to stay open, and those positions are more likely to be closed or liquidated on a move against them.

Funding that flips negative during a decline often marks capitulation in the other direction — shorts have become the crowded side. Reading funding alongside open interest is more informative than reading either alone: rising open interest with rising funding means new leveraged longs, while falling open interest with high funding usually means positions are being closed.