Why a perpetual contract needs funding
A traditional futures contract has an expiry date: on that day the contract settles and its price converges with the underlying market. A perpetual contract has no expiry, so without any extra rule its price could drift far away from the asset it is supposed to track. Exchanges solve this with the funding rate — a payment exchanged directly between traders that makes holding the expensive side of the market costly.
When the contract trades above the index because buyers are aggressive, the rate goes positive: longs pay shorts. That cost discourages more buying and rewards sellers, pulling the contract back toward the index. When the contract trades below the index, the mechanism runs in reverse. Funding is therefore an anchoring mechanism, not a fee charged by the exchange.
- It is peer to peer. Payments move between long and short position holders; the exchange calculates and transfers them.
- It is periodic. The rate is quoted per settlement interval, not per month.
- It is automatic. Your margin balance is debited or credited at settlement with no action from you.
Who pays whom: positive vs negative funding
The sign of the rate tells you which side is crowded and which direction the money moves:
| Rate | What it usually reflects | Payment direction |
|---|---|---|
| Positive (e.g. +0.01%) | Perp price above the index; longs are the aggressive, crowded side | Longs pay → shorts receive |
| Negative (e.g. −0.02%) | Perp price below the index; shorts are the crowded side | Shorts pay → longs receive |
| Around zero | Contract trading close to the index; neither side pays meaningfully | Payment near zero |
Worked payment for one interval, using the basic formula:
funding payment = position notional × funding rate
position notional = contract size × price
Suppose you hold 0.5 BTC of a BTC perp at a price of 64,000 USD. Notional = 0.5 × 64,000 = 32,000 USD. At a rate of +0.01%:
- A long pays 32,000 × 0.0001 = 3.20 USD this interval.
- A short with the same notional receives 3.20 USD.
If the rate were −0.01%, the positions would swap: the short would pay 3.20 USD and the long would receive it. The exchange is not on either side of this payment.
The settlement rule: when you actually pay
Funding is charged at fixed timestamps. On the most common schedule it settles every 8 hours — at 00:00, 08:00 and 16:00 UTC — giving three payments per day. Other contracts settle every 4, 2 or 1 hour, and the quoted rate always applies per interval.
The rule that surprises beginners:
If your position is open at the settlement timestamp, you pay or receive that interval's funding. If you close one second before settlement, you do not. Opening right after settlement means you carry the position until the next one.
Some exchanges apply a small charge proportional to time held if a position is opened very close to settlement, to discourage funding-timing games — check the contract rules on the venue rather than assuming. Funding rates themselves are usually displayed as a prediction that updates continuously until settlement; only the value at the timestamp is what you actually pay.
Turning the rate into a holding cost
A single interval looks cheap, which is exactly why it must be annualized before judging a hold. At +0.01% every 8 hours (3 intervals/day):
| Period | Intervals | Rate applied to 32,000 USD | Cost for a long |
|---|---|---|---|
| One interval | 1 | 0.01% | 3.20 USD |
| One day | 3 | 0.03% | 9.60 USD |
| 30 days | 90 | 0.90% | 288 USD |
| One year | 1,095 | 10.95% | 3,504 USD |
The simple annualized rate (APR) is: rate per interval × intervals per year = 0.01% × 1,095 = 10.95%. This assumes the rate stays constant, which it never does — treat it as an order-of-magnitude carrying cost, not a forecast.
Do the same calculation for any position in seconds: open the funding rate calculator.
How funding interacts with liquidation
Funding is not just an accounting line — it is deducted from the margin balance that keeps the position open. A long paying funding while price moves sideways is slowly losing collateral, so its liquidation price creeps closer even though nothing appeared to happen. The effect is largest for positions that:
- use high leverage, so the margin buffer is small relative to notional;
- are held through many settlements;
- are opened when the rate is at an extreme and the rate stays extreme.
The mechanics behind this — margin requirements and how the liquidation price is reached — are covered in the liquidations pillar, and how 10x changes the size of the buffer is in the leverage basics guide.