The funding rate is a mechanism used to narrow the price gap between perpetual contracts and the corresponding spot market. It is a unique feature of perpetual contracts and affects both the position’s profit and loss and even the liquidation price.
1. Funding Fee Settlement Mechanism
Perpetual contracts use funding fees to anchor the contract price to the spot price.
Unlike traditional futures contracts, perpetual contracts do not require delivery, allowing users to hold positions long-term. However, since there is no delivery, a mechanism is needed to ensure that the contract price aligns with the spot price, and this mechanism is known as the funding fee.
The funding fee is paid between long and short traders, and the positive or negative funding rate determines who pays the fee. Funding fees are fully settled between users, and the platform does not charge any fees. When the funding rate is positive, long traders will pay the funding fee, and short traders will receive the fee.
2. Impact of Funding Fee Settlement on Position PnL and Liquidation
The settlement of the funding fee may indirectly affect the position’s profit and loss. When a user needs to pay the funding fee and has insufficient available balance, the position will incur a loss, reflected in a reduction of the position's margin. If the position's margin falls below the maintenance margin, forced liquidation will occur.
Thus, the funding fee does not directly affect liquidation, but it does impact the position's margin.
※ Continuous payment of funding fees can lead to the position’s margin falling below the maintenance margin, resulting in forced liquidation.
Funding Fee = Position Value x Funding Rate
Position value is determined by the mark price at the time of the funding rate settlement.
For example, in a USDT-M: Trader B holds a long position in a 1 BTC/USDT contract, and the mark price at the time of funding settlement is 20,000 USDT. The current funding rate is -0.01%, and the contract face value = 100 USDT per contract.
First, calculate the position value:
Position Value = Contract Face Value x Contract Quantity x Mark Price
= 100 x 1 x 20,000 = 2,000,000 USDT
Next, calculate the BTC/USDT funding fee:
Funding Fee = Position Value x Funding Rate
= 2,000,000 USDT x 0.01% = 200 USDT
Since the funding rate is negative (-0.01%), the short position will pay the funding fee to the long position.
Therefore, Trader B will receive 200 USDT as the funding fee, while the long traders with the same contract quantity will pay the 200 USDT funding fee.
3. How to Control Position Risk?
The funding fee settlement is linked to the position value and is positively correlated. The larger the position value, the more funding fees will be paid or received. If your position is large, it is advisable to pay closer attention to the impact of funding fee settlements on your position.
4. Avoid Funding Fee Settlement Times and Close Positions Early
Perpetual contracts settle every 8 hours at the following times: SGT 08:00, 16:00, and 00:00. Only users who hold positions at the time of settlement will be required to pay or receive funding fees. If a position is closed before the settlement time, no funding fee will be charged or received.
5. How to Use the Funding Fee Mechanism for Stable Arbitrage?
In addition to paying funding fees, users may also receive funding fees. This can be utilized to earn low-risk, long-term profits, while also diversifying investments to gain profits even in lower volatility markets.
This means you can implement funding rate arbitrage by simultaneously opening a short position in perpetual contracts and a long position in spot trading on different markets.