Funding Rate

The funding rate is the price rebalancing mechanism of the perpetual contract. Unlike traditional futures that need to be delivered when the futures expire (the delivery futures will be delivered at the index price, so the futures price will eventually return to the index price), the perpetual contract has no expiration or delivery, so it needs to use the funding rate mechanism to let the futures price anchor the spot price.

Funding Fee Settlement Rules

Every 8 hours is a period, and settlement will be made at the end of each period. Settlement 3 times a day, namely 00:00, 08:00, 16:00 (GMT+8).

Only users who hold positions at the time of settlement need to charge or pay funding fees. If the position has been closed before the settlement, no funding fees will be charged or paid.

At the time of settlement, whether the user should charge or pay the funding fee is determined by the current funding rate and the user's position. When the funding rate is positive, the long position will pay the funding fee, and the short position will charge the funding fee; When the funding rate is negative, a long position will be charged a funding fee, and a short position will be charged a funding fee. The funding fee is completely settled between users, and the platform will not charge any fees for it.

Example:

When Bitcoin continues to rise, most people prefer long positions. At this time, the future price is 30,000, and the spot price is only 29,500, so the price has deviated. If the funding rate is calculated to be 0.15%, the long positions will be paid 0.15% of the nominal value of the positions to the short positions every 8 hours. Because short positions are profitable, many people will buy BTC to charge a funding fee of 0.15% every 8 hours. This short-selling arbitrage behaviour will cause the future price to go back down, allowing it to return to the spot price.

The settlement of the funding fee is carried out in units of positions and is directly added or deducted from the position margin.

The funding fee charged is in the same currency as the margin. The position that is charged is the position that is judged to be a price deviation.

Funding fee = position value * funding rate

Position value = size * contract size * mark price

Funding Rate Calculation

The funding rate consists of two parts: composite rate and premium.

Composite Rate

A perpetual contract consists of two currencies: the underlying currency and the quote currency. For example: BTCUSDT perpetual contract, the underlying currency is BTC, and the quote currency is USDT.

Underlying currency interest rate: The daily lending rate of the underlying currency in the market. For example, the underlying currency of the BTCUSDT contract is BTC, and the interest rate of the underlying currency is the daily lending rate of BTC.

Quote currency interest rate: The daily lending rate of quote currency in the market. For example, the quote currency of the BTCUSDT contract is USDT, and the interest rate of the quote currency is the daily lending rate of USDT.

Composite rate = (quote currency interest rate – underlying currency interest rate) / funding rate settlement frequency

Currently, the quote currency interest rate of all perpetual contracts is 0.06%, the underlying currency interest rate is 0.03%, and the funding rate settlement frequency is 3 times (3 settlements per day). Therefore, the base composite rate of all current perpetual contracts is 0.01%.

Average Premium Index

The perpetual contract may have a premium or discount relative to its reasonable price. We use the premium index to measure the premium of the contract and add it to the calculation of the funding rate.

The premium index is an important parameter of futures. The higher the premium, the higher the funding rate; the lower the premium, the lower the funding rate. By raising or lowering the funding rate, the contract price will return to a relatively reasonable level.

Funding Rate Basis Rate

The funding rate basis rate reflects the curve inherited from the previous period's premium level with time decay.

Funding rate basis rate = funding rate of the current period * (time interval from the current time to the settlement of the current period/settlement cycle)

Example:

The current BTC perpetual contract funding rate is 0.01%. The current time is 8:30, and the settlement time for this period is 16:00. That is, there are still 7 hours and 30 minutes before the settlement. The settlement cycle is 8 hours (settlement every 8 hours), then the current funding rate basis rate = 0.01% * ( 450 / 480 ) = 0.009375%.

Reasonable Price

The reasonable price is a relatively reasonable reference price for the perpetual contract calculated based on the current spot index price and the current funding rate basis rate.

Reasonable price = index price * (1 + funding rate basis rate)

For example, if the current BTC index price is 10,000 USDT, the funding rate basis rate of the BTC perpetual contract is 0.005%. Then the current reasonable price of BTC perpetual contract = 10000 * ( 1 + 0.005%) = 10000.5 USDT.

Depth-Weighted Bid/Ask Price

Depth-weighted bid price refers to the average buy order price of contracts whose cumulative pending order volume reaches N USDT starting from the first tranche of the buy order based on the current order status.

Among them, the value range of N: 8000USDT, namely SUM (pending order price * pending order quantity) = 8000 USDT

Premium Index

The premium index, which is calculated every minute, reflects the premium situation generated by the current funding rate basis rate and the deviation of the depth-weighted bid/ask price relative to the reasonable price.

Premium index = [ Max ( 0 , depth-weighted bid price – reasonable price ) – Max ( 0 , reasonable price – depth-weighted ask price ) ] / index price + funding rate basis rate;

It can be seen from the formula: a) When depth-weighted ask price ≥ reasonable price ≥ depth-weighted bid price:

Premium index = funding rate basis rate

b) When depth-weighted ask price > depth-weighted bid price > reasonable price:

Premium index = (depth-weighted bid price – reasonable price) / index price + funding rate basis rate

c) When reasonable price > depth-weighted ask price > depth-weighted bid price:

Premium index = (depth-weighted ask price – reasonable price) / index price + funding rate basis rate

Average Premium Index

The current average premium index, which is calculated every minute, is the arithmetic mean of all current premium indexes in the last hour.

Example:

During the period from 8:00 to 9:00, the average premium index at 8:30 is the arithmetic mean of all premium indices from 7:30 to 8:30; The average premium index at 9:00 is the arithmetic mean of all premium indices from 8:00 to 9:00.

Funding rate

The funding rate is jointly determined by the composite rate and the average premium index, and the formula is as follows:

Funding rate = clamp (average premium index + clamp (composite rate – average premium index, premium deviates from the upper limit, premium deviates from the lower limit), funding rate upper limit, funding rate lower limit)

Among them, the clamp is an interval-limiting function. When the target value exceeds the upper and lower limits, only the boundary value will be taken.

Example:

clamp(a, max, min), when a > max, the result is max; When a < min, the result is min; when max ≥ a ≥ min, the result is a.

(Composite rate – the average premium index) bounded by the premium deviation upper bound and the premium deviation lower bound, in between; The final prediction of the funding rate for the next period is limited by the upper limit of the funding rate and the lower limit of the funding rate, which is between the two.