The Funding Fee is a fee paid to traders. The fee is calculated based on the difference between the perpetual contract prices and spot prices.
In a bullish market the Funding Rate is positive and is usually going up further. In these circumstances traders who have long positions will pay a Funding Fee to traders having short positions. When the market is bearish, the funding rate is negative, and the traders holding short positions will pay a funding fee to the long position traders.
The main reason for Funding Fees is to make the perpetual contract and the associated asset's prices align. Since perpetual contracts, unlike traditional futures, have no expiration date, crypto exchanges developed this system to make perpetual contract prices match the index price. This mechanism is also known as the Funding Rate.
Futures contracts can be traded at a price different from the Mark Price. Mark Price is the price used to decide whether to liquidate a position: the Mark price is compared with the liquidation price. When compared to the trading price, the Mark Price is an estimate for a genuine value of a contract.
If a contract is traded at a price that differs from the mark one, the Premium Index will be used to raise or lower the Funding Rate in the next funding period. The Interest Rate, that is the difference between the rates of the base and quoted currencies, and Premium Index are calculated every minute and stored in a time series. Then this series is used to calculate the time-weighted average value for a time period equal to the funding period.
The resulting averaged Interest Rate and Premium Index values are applied to calculate the funding rate according to the following formula:
rf is a Funding Rate;
ip is an Average Premium Index;
ri is an Average Interest Rate (currently it is fixed at 0.01% per funding period).
Then the Funding rate is applied to the Mark price of the position to calculate the Funding Fee.
The Funding Fee is charged and paid every 8 hours. The time before the next Funding is displayed on the chart (see the screenshot below).
The Funding fee or the charge is paid, when the countdown counter reaches 0. Therefore, if you opened a position after the counter started, and it was closed before the counter expired, you will neither pay nor receive the funding.
The amount of the fee depends on the Funding Rate. The higher the Funding Rate, the higher the Funding Fees.
The rate polarity shows the payment direction, and the rate number shows the payment volume.
If the Funding Rate is greater than 0, for example, 0.05%, and it’s the Funding time, traders with open long positions will pay 0.05% from the size of their position (by Mark Price) to the traders holding short positions.
If the Funding Rate is less than 0, traders with short positions pay to the traders holding long positions.
The Funding is charged or paid to a certain contract, that is to the trader holding this contract. Changelly PRO receives no profit from the Funding payments, all payments of this kind are processed directly between our traders.