Perpetual Futures Funding

Perpetual futures funding is a mechanism used by exchanges to ensure the price of a perpetual futures contract stays close to the spot price of the underlying asset. Because these contracts never expire, they rely on a funding rate, which is a periodic payment made between long and short traders.

If the contract price is trading above the spot price, the funding rate is positive, and longs pay shorts. If it is trading below, the rate is negative, and shorts pay longs.

This creates an economic incentive for traders to push the contract price toward the spot price. The funding rate is determined by the market demand for leverage and is a key indicator of market sentiment.

Traders can use the funding rate to identify opportunities for arbitrage or to hedge their existing positions. It is a fundamental part of the microstructure of crypto derivatives and plays a vital role in price discovery.

Understanding how funding works is essential for anyone trading perpetual futures.