What is Funding Rate
The funding rate is the tool that helps perps' value converge to the spot value, i.e., incentivize the mark price to align with the index price. When the index and mark prices diverge, the system transfers funding fees between longers (buyers) and shorters (sellers).
If the mark price is higher than the index price, which means more positions in longing (buying) than shorting (selling), longers pay the difference value of ($mark - $index) to shorters and vice versa.
The funding rate is typically calculated and exchanged periodically. For instance, BitMEX and Binance do this every eight hours. Different exchanges may have varying methods to determine the funding rate. Calculating the funding rate may involve factors such as the difference between the contract price and the underlying asset's spot price and the interest rate and demand for the contract. Exchanges generally provide transparent information regarding how the funding rate is determined, and traders can monitor the funding rate in real time on the exchange's trading platform.
Traders need to understand the funding rate mechanism and its implications when engaging in perpetual trading, as it can affect the profitability of their positions.
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