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The funding rate

Updated: Jul 29, 2023

In this post I'll go more in depth on what the funding rate is and I'll tell you about some important differences between the designs that different exchanges use, because not all funding rates are the same!



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First the basics...

The funding rate is a perpetual swap contract mechanism that exists to make sure that the price of the perp doesn’t deviate too much from the underlying: a spot index of the coin that you’re trading.


If the last price of the perp is trading significantly higher than the spot index funding will be above baseline. If it’s trading significantly lower than the spot index funding will be below baseline. I'll come back to what a "baseline" is later.


The damper The funding rate will snap to a default value when the price difference between the perp and the spot price is negligible. We call that default value the baseline. And we call this mechanism of snapping to baseline "the damper".


The clamp There are also maximum values. No matter how much the price of the perp disconnects from the spot index, the funding rate will stop increasing/decreasing at a certain point. We call this function of capping the funding rate "the clamp".


You can look at the funding rate as some sort of interest that market participants who have an open position have to pay or receive depending on their position and the rate. Funding positive: longs pay shorts. Funding negative: shorts pay longs.

Funding is exactly at zero: no one pays anything.


The exchange doesn't make any money on this, it only facilitates the exchange of these payments. Clearly, the funding rate has a very real impact on trading because keeping a position open can cost you money. Or, you can get paid! However, something important to understand is that not all funding rates are equal. Almost every exchange has come up with a slightly different design. Let's talk about those subtle, yet important differences.


Binance

Clamp: it's different for every coin, but for BTC for example it's +0.3%/8h & -0.3%/8h. Damper: if the price difference is less than +0.06% & -0.04% it'll snap to baseline. Baseline: at the time or writing Binance's baseline funding rate is 0.01%/8h for every single coin except for BNB. BNB's baseline is 0%. This means that BNB's funding rate will almost always be a lot lower than other coins by default.

For more info on Binance funding specifications click here.


Bybit

Clamp: for most coins it's +0.75%/8h & -0.75%/8h. Damper: if the price difference is less than +0.05% & -0.05% it'll snap to baseline. Baseline: 0.01%/8h for all coins.

For more info on Bybit funding rate specifications click here.


OKX Clamp: for BTC it's +0.375%/8h & -0.375%/8h, for majors it's +0.75%/8h & -0.75%/8h and for all other coins it's +1.50%/8h & -1.50%/8h. Damper: there is none! Baseline: there is none! Because there's no damper or baseline OKX's funding rates look a bit more wild so to speak.

For more info on OKX funding rate specifications click here.


Deribit Clamp: +0.5%/8h & -0.5%/8h. Damper: if the price difference is less than +0.05% & -0.05% it'll snap to baseline. Baseline: 0%. Because of the 0% baseline, funding is by default going to be lower on Deribit than on most other exchanges.

For more info on Deribit funding rate specifications click here.


Other ways that funding rates differ is because of how their respective spot indices are calculated. Such small differences do have an impact on the funding rate. So always take a look at the contract specifications of the perp that you're trading. Another reason why funding rates can be fundamentally different is the nature of the perp contract. Inverse perps for example will generally have lower funding rates than linear perps because of the collateral and how convexity works. For more information on that I recommend that you read this article.


What prompted me to talk about this is the fact that a lot of people aggregate funding rates without thinking about it. I hope that you understand now that not all funding rates should be treated the exact same way. If you're going to aggregate, which is fine, then at least use an open interest weighted aggregate. Platforms like Velo, Coinalyze, Laevitas & Coinglass have all created such indicators. Why OI weighted? Because the contract with more OI has more traders and more money on the line that's affected by the funding rate. So a contract with high OI obviously has a bigger impact on the market than a contract with less OI, duh. But I advocate for also looking at individual rates.


An aggregate can be misleading. Maybe there's a funding rate that snaps to baseline, which makes the aggregate value increase. This doesn't necessarily mean that people are longing, it's just a rate that's resetting. If you include Deribit for example which has a baseline of 0%, the aggregate value will appear to be lower than it "should" be. Again, this can make you draw the wrong conclusions. I could keep giving examples, but I think that you get the point. When you lump different data points together a lot of nuance can get lost. So if you really want to understand what's happening in the market, look at individual funding rates!


Keep in mind that all of the stats in this thread are obviously subject to change when the exchanges decide to tweak their contracts (which does happen sometimes).


That's it for this post.

Until next time!

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