📈Funding Rates

Description and calculations of the perpetual contract funding rates on Vertex.

Funding Rates

Funding rates are a core element of any perpetual swap product – also known as perpetual contracts. Since perpetuals have no fixed expiration date, perpetual contracts can be held indefinitely.

As a result, the typical convergence of a traditional futures price with the underlying asset price as expiration approaches don’t apply to perpetuals.

Instead, perpetuals tether the price of the perpetual contract to the underlying asset’s spot price via funding rates. Funding rates modulate the incentive to trade a given perpetual contract, either long or short, by assigning a positive or negative value to a specific perpetual market.

• Positive Funding Rate = Perpetual Mark Price > Spot Index Price

• Negative Funding Rate = Perpetual Mark Price < Spot Index Price

Metering incentives via the funding rate prevents the mark price of a perpetual from deviating significantly from the underlying index spot price over time.

If the perpetual price is too high relative to the spot index price, longs pay shorts to swing incentives to shorts – pushing the price back down. If the perpetual price is too low relative to the spot index price, shorts pay longs to swing incentives to longs – pushing the price back up.

The funding rate is analogous to an interest rate paid by open long or short perpetual positions based on the current market conditions and how the funding rate is calculated. Funding rates can render open long or short positions more costly or advantageous to maintain over time, depending on their assigned value.

Funding rates are paid or received proportional to an open market position’s size.

Consequently, funding rates replicate the expiration-based convergence of traditional futures and spot prices without expiration. Payments on open positions invoked by funding rates are paid or received only between traders on each side (e.g., long/short) of an individual perpetual market.

For example:

• If the ETH perpetual funding rate is positive, traders with open long ETH positions pay the prevailing funding rate to open short positions for the current funding interval.

• If the ETH perpetual funding rate is negative, traders with open short ETH positions pay the prevailing funding rate to open long positions for the current funding interval.

Calculations of the funding rate reflect the open interest of a specific perpetual market.

Open Interest = the sum total of all open positions for an individual perpetuals market.

The positive or negative value assigned to a funding rate determines the interest rate payments between longs and shorts within a given funding interval – expressed as a percentage of an open position’s size.

Funding rates are variable, adjusting to real-time market conditions for each perpetual market on Vertex.

Users should always consider the funding rate of a perpetual market they’re trading. Funding rates can sometimes generate a significant impact on an open position’s PnL based on the present market conditions, especially if holding an open perpetual position for extended periods.

Vertex’s Funding Rate Calculations

Vertex calculates the funding rate for perpetuals by taking into account the following characteristics of a specific perpetual market:

• Spot Index Price

• Perpetual Contract Mark Price

• Funding Interval

Stork, a decentralized, high-performance oracle network, provides these rates.

• Spot Index Price = See Oracle Section.

• Perpetual Contract Mark Price = This is calculated using the internal Vertex perpetual price. Vertex uses a TWAP of the orderbook price as the mark price.

• Funding Interval = The funding interval is when the funding rate is paid or received between two sides of a perpetual contract. On Vertex, the funding interval is set at one hourly period.

Perpetual Contract Funding Rate Calculation

Funding is calculated with reference to the funding index, which is computed as follows:

• Funding Index = TWAP (Perp Mark Px) - TWAP (Spot Index Px)

• Funding Payment = Funding Index / 24

This payment is then transferred between longs and shorts.

Funding is capped at 10% per day.

Reference Price Data Feeds (Oracles)

Index Price

Each publisher can contribute an index price for the markets supported by Stork. Implementing the index calculation is at each publisher’s discretion. For example, not every publisher will converge their price.

General Methodology

Aggregation of real-time prices from select exchanges:

• Dexterity: Median of order book mid-prices from supported exchanges.

• Other publishers: Median of last trade price from supported exchanges.

Supported exchanges: Exchanges with major USD or BUSD markets: Binance, Coinbase Pro, Kraken.

Support for USDT markets is under development using Binance spot USDT - BUSD to convert into USD-denominated prices. USDT markets from the following exchanges are used:

• Binance

• OKX

• ByBit

• Kucoin

• Bitfinex

A beta version of this publisher is available to Stork customers for testing purposes.

Historical funding rates for Vertex will be available soon after the mainnet launch.

Funding Rate Descriptions

Positive Funding Rates

If the perpetual contract’s mark price is higher than the spot index price of the underlying asset, then the funding rate will be positive.

Positive Funding Rate = Perpetual Mark Price > Spot Index Price

Traders holding a long position in the perpetual contract will pay the traders holding the short position. The payment occurs on a fixed interval basis at whatever the prevailing funding rate is calculated for that interval.

Positive funding rates reflect the perpetual trading at a premium to the underlying asset’s price.

As the perpetual’s premium (e.g., deviation above the spot price) increases, so does the funding rate. This renders long positions more costly to maintain and incentivizes the perpetual price to normalize lower – converging closer to the spot price.

Example – Positive Funding Rate

• ETH Perpetual Price > ETH Spot Index Price

• Funding Rate = + 0.1% or 36.5% annualized

Let’s assume that 1 ETH equals 1,000 USDC.

• Alice is long 10 ETH perpetuals (net position size = 10,000 USDC)

• Alice’s initial margin = 1,000 USDC

• Alice’s leverage = 10X

• Alice pays short contracts in the ETH perpetual 0.1% of her open 10 ETH long position every 24 hours

• This means Alice will pay (0.001*10,000)/24 every hour

Alice’s funding rate payment in the current interval = 0.426 USDC

In reality, neither ETH's funding rate nor market price is static. As a result, the actual funding payment by Alice to open shorts may be slightly higher or lower than the 0.426 USDC expressed above.

Importantly, perpetual contracts are leveraged products, meaning that the funding rate significantly impacts the PnL of a given trade since it is calculated on the face amount and not the margin used to hold it, which amplifies funding importance.

Positive funding rate payments by Alice to shorts in the ETH perpetual will reduce her returns on profitable long trades and make her open positions more costly to maintain over time. The latter assumes the funding rate remains positive, and Alice holds her position through multiple funding intervals.

Funding rates in various perpetuals markets within crypto can remain positive or negative (i.e., deviate from the spot price) for extended periods. Historically, perpetuals markets in crypto have maintained positive funding rates for months at a time.

Negative Funding Rates

If the perpetual contract’s mark price is lower than the spot index price of the underlying asset, the funding rate will be negative.

Negative Funding Rate = Perpetual Mark Price < Spot Index Price

Traders holding a short position in the perpetual contract will pay the traders holding the long position. The payment occurs on a fixed interval basis at whatever the prevailing funding rate is calculated for that interval.

Negative funding rates reflect the perpetual trading at a discount to the underlying asset’s price.

As the perpetual’s discount (e.g., deviation below the spot price) increases, so does the funding rate. This renders short positions more costly to maintain and incentivizes the perpetual price to normalize higher – converging closer to the spot price.

Example – Negative Funding Rate

• ETH Perpetual Price < ETH Spot Index Price

• Funding Rate = - 0.1%

Let’s assume that 1 ETH equals 1,000 USDC.

• Alice is long 10 ETH perpetuals (net position size = 10,000 USDC)

• Alice’s initial margin = 1,000 USDC

• Alice’s leverage = 10X

• Short contracts in the ETH perpetual pay Alice the funding rate of 0.1% proportional to her open 10 ETH long position every 24 hours

• This means Alice will receive (0.001*10,000)/24 every hour

Alice’s received funding rate payment in the current interval = 0.426 USDC

Again, neither the funding rate nor the market price of ETH is static. As a result, the actual funding payment paid by open shorts to Alice may be slightly higher or lower than the 0.426 USDC expressed above.

In this case, Alice’s open long ETH perpetual position receives the funding rate payment from open short contracts. As a result, the impact on her PnL is reduced compared to when the funding rate was positive.

For example, the negative funding rate shorts pay Alice will augment her returns on profitable trades (even if marginally) and eliminate the cost of maintaining her open position. The latter assumes the funding rate remains negative, and Alice holds her long position through multiple funding intervals.

Funding rates in various perpetuals markets within crypto can remain positive or negative (i.e., deviate from the spot price) for extended periods. Historically, perpetuals markets in crypto have maintained positive funding rates for months at a time. Conversely, funding rates may also remain negative for extended periods.