[Essential for Newbies] What is the Settlement Method of Funding Rate?

Unlike conventional Futures contracts, perpetual contracts will never settle either on a monthly or quarterly basis. As such, crypto trading platforms have come up with a mechanism known as Funding Rate to ensure future prices and index prices converge on a regular basis.        

The funding rate is a regular payment to traders who are either long or short based on the price differences between perpetual contract prices and index prices. 

When the market trend is bullish, the funding rate will be positive, and traders who are long need to pay to those who are short. On the contrary, when the market trend is bearish, the funding rate will be negative and so the shorts will pay the longs. 

Our platform will not impose any charges on funding, as it’s exchanged directly peer-to-peer. To ensure the trading prices trend closely to spot index prices, the positive or negative funding rate will determine which party needs to pay. 

As you can see, the funding fees will be displayed under the running bots.

For the Futures grid, the funding rate is calculated every 8 hours at 20:00，04:00 and 12:00(UTC) . Users will only pay or receive the funding if they hold a position at one of these times. 

We will take BTC perpetual contracts as an example. Let’s assume that the price difference is -20～20bps between the perpetual contracts price and spot prices, which is a reasonable range. If User A, the buyer of the contract, purposely pulled up the contract price, increasing the price difference to 100bps when it reached 12:00(UTC), the price difference would be out of mark. As such, User A needs to compensate those who are currently doing short, and so the system will automatically deduct from User A’s profits. 

Generally speaking, for perpetual Futures contracts, the more the price difference is, the more compensation the shorts will receive.

Please take note that the funding charges have a 15 second deviation. For instance, if User A still holds a position at 20:00:05 (UTC), he will still be charged for the funding. And if User A holds the position for a period of time, he will be charged more than one time.