Funding Payments
| Funding payments are periodic payments between traders that are intended to reduce the difference between the spot market price and the perpetual market price. Funding payments are made when the difference between the two prices is greater than a certain threshold, and are typically made every 8 hours. The purpose of funding payments is to keep the price of the perpetual contract closer to the spot price, as the spot price is the price at which the underlying asset is actually traded. If the price of the perpetual contract were to diverge too far from the spot price, it would become less attractive to traders, and would eventually lead to the contract's liquidation. Funding payments are typically made by the party that is long the contract, as they are the ones with the most to lose if the price of the contract diverges too far from the spot price. However, in some cases, the party that is short the contract may make the funding payment. This is typically done when the party that is short the contract believes that the price of the contract will soon converge with the spot price. The size of the funding payment is typically proportional to the size of the price difference between the spot market price and the perpetual market price. However, the funding payment can never be greater than the Mark Price, which is the price used to calculate the liquidation price. The Mark Price is typically the average of the spot price and the perpetual price over the past 30 minutes. If the price difference between the spot market price and the perpetual market price is greater than the funding rate, then the party that is long the contract will have to make a funding payment. The funding rate is typically 0.01% per 8 hours, but is subject to change. The funding rate is calculated using the following formula: Funding Rate = (0.01% * Spot Price) / (1 - Perpetual Price) For example, if the Spot Price is $100 and the Perpetual Price is $99, then the funding rate would be 0.01%. This means that the party that is long the contract would have to pay the party that is short the contract $1 every 8 hours. The funding payments are used to reduce the price difference between the spot market price and the perpetual market price. In most cases, the funding payments are made by the party that is long the contract. The size of the funding payment is typically proportional to the size of the price difference between the spot market price and the perpetual market price. |
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