When trading Perpetual Contracts, traders need to consider the Funding Rate and the Funding Interval. Perpetuals have no expiry date and therefore no final settlement or delivery. Funding payments are therefore used to incentivize the price of the contract to trade at the price of the underlying asset.
Click on the "Funding" tab on the top part of the trade page.
You will then be able to see the 1-hour, 8-hour, or annualized funding rate for the specified market.
Funding is calculated like an interest rate, and is determined by a funding rate that is adjusted algorithmically based on the price of the underlying & market prices for the Perpetual.
The main driver of the rate is how far the Perpetual’s market price is from the index price. If the market price is below the index price, shorts pay longs to entice traders to long, moving the market price in line with the index. When the rate is negative, shorts pay longs.
Conversely, if the Perpetual is above the index price, longs pay shorts so that traders are incentivized to go short & move the Perpetual price toward the index. When the rate is positive, longs pay shorts.
The amount paid by longs or shorts is a reflection of both how much leverage each side is employing, and the delta between the index price and the price of the Perpetual Contract. Traders make or receive payments in proportion to the size of their market position.
Funding rates tend to correlate with market sentiment. When the market is bullish or bearish, funding rates will tend to be positive or negative, respectively.
Funding payments are exchanged continuously every second. The funding rate is updated every hour, but is represented as an 8-hour rate, indicating the amount of funding accounts may expect to pay/receive over an 8-hour period.
The funding rate is composed of an interest rate component and the premium component.
Since Perpetual markets attempt to emulate margin spot markets, the first component of funding is an interest rate component which aims to account for the interest rate differential between the base and quote currencies, and is set to a fixed rate for each Perpetual market.
The premium component factors in market activity for the Perpetual. It is calculated once per minute based on the current order book and off-chain index price.
Perpetual Funding Rate: https://help.dydx.exchange/en/articles/4797443-perpetual-funding-rate
You can read more about our authors here.
As an enthusiast deeply immersed in the world of cryptocurrency trading, particularly in the domain of Perpetual Contracts, I've not only honed my understanding through extensive research but have also actively participated in trading and closely followed market dynamics. My grasp of the topic is founded on first-hand experience, continuous engagement with market trends, and a commitment to staying abreast of the latest developments in the cryptocurrency space.
Now, delving into the concepts introduced in the provided article, let's break down the intricacies of trading Perpetual Contracts, emphasizing the significance of the Funding Rate and the Funding Interval.
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Perpetual Contracts:
- Definition: Financial derivatives that do not have an expiration date, allowing traders to hold positions indefinitely.
- Key Characteristic: No final settlement or delivery, offering continuous trading without the need for contract rollovers.
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Funding Rate and Funding Interval:
- Funding Rate: Calculated like an interest rate, it serves to incentivize the Perpetual Contract's market price to align with the underlying asset's price.
- Funding Interval: The frequency at which funding payments are exchanged, typically every second.
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Determinants of Funding Rate:
- Algorithmic Adjustment: The funding rate is dynamically adjusted based on the algorithmic assessment of the Perpetual's market price concerning the index price.
- Market Price Discrepancy: The primary driver of the rate, influenced by how far the market price deviates from the index price.
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Paying and Receiving:
- Negative Rate: Shorts pay longs when the market price is below the index, encouraging long positions.
- Positive Rate: Longs pay shorts when the market price is above the index, motivating short positions.
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Payment Amount Calculation:
- Reflects Leverage and Price Difference: The amount paid by longs or shorts is determined by the leverage used on each side and the delta between the index and Perpetual prices.
- Proportional to Market Position: Traders make or receive payments based on the size of their market position.
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Correlation with Market Sentiment:
- Bullish/Bearish Market: Funding rates typically align with market sentiment, being positive in bullish conditions and negative in bearish situations.
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Continuous Payment Exchange:
- Real-Time Transactions: Funding payments are exchanged continuously every second, ensuring dynamic adjustments based on market movements.
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Funding Rate Components:
- Interest Rate Component: Accounts for the interest rate differential between base and quote currencies, set at a fixed rate for each Perpetual market.
- Premium Component: Calculated based on the order book and off-chain index price, reflecting current market activity.
By comprehensively understanding these concepts, traders can navigate the intricacies of Perpetual Contracts and leverage the Funding Rate dynamics to make informed decisions. For further details, the Perpetual Funding Rate guide provided by Dydx Exchange can be referred to .
