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Crypto and DeFi · Spot vs Perpetual Futures

Funding rates: the mechanism

Understand how funding rates work and why they exist.

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Crypto and DeFi

Spot vs Perpetual Futures

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Lesson 32 of 79Crypto and DeFiSpot vs Perpetual Futures

Today's tiny win: make one idea click.

Understand how funding rates work and why they exist.

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The eight-hour heartbeat of the perp market

Every perp market has a clock. On the most common venues, it ticks every eight hours. At each tick, an exchange-published number called the funding rate is applied to every open position. Traders on one side of the market pay the other side. If the funding rate is positive, longs pay shorts. If it's negative, shorts pay longs. The exchange doesn't collect any of it — it's a peer-to-peer transfer.

Wick checks a calculator showing $1 because a $10,000 long at 0.01% funding pays $1 each 8 hours even with only $500 of margin, showing funding uses position size.$10,000 long x 0.01% =$1 per 8h$1
Wick saysFunding is paid on your full position, so a $10,000 long at 0.01% pays $1 every 8 hours.

Why does this exist? Because perps don't expire, exchanges needed a mechanism to keep the perp price close to the underlying spot price. Funding is that mechanism. When traders pile into longs and bid the perp price above spot, the funding rate turns positive — longs have to pay shorts to hold their position. That cost discourages new longs, encourages new shorts, and the perp price drifts back toward spot. When traders pile into shorts and the perp price falls below spot, the opposite happens. Funding flips negative, shorts pay, longs get paid, balance is restored.

Two pieces feed into the funding rate. The first is the premium index — how far the perp price has drifted from spot, measured as a percentage. The second is a tiny interest component, usually a fixed small number. The exchange adds those, applies a cap and floor so the rate can't go wild, and that's the published number. You don't need to memorize the formula. You need to know the direction: positive funding signals long-heavy positioning, negative funding signals short-heavy positioning.

Wick stands by a 24-hour dial split into three 8-hour funding cycles, showing the steady heartbeat of payments between longs and shorts.2461218Cycle 1Cycle 2Cycle 3Funding every 8hours
Wick saysOn most venues, funding is paid three times a day, once every 8 hours.

Funding payments are small per cycle but they compound. A 0.01% rate every eight hours is 0.03% per day — about 11% annualized. A 0.1% rate, which is on the edge of 'extreme,' is 0.3% per day — over 100% annualized. We'll cover the extremes in a couple lessons. For now, internalize the loop: perp price drifts from spot, funding pushes back, prices converge.

Wick points at a chalkboard showing 0.01% every 8 hours is 0.03% a day, about 11% a year, showing small funding payments compound over time.It adds up0.01% per 8h = 0.03%/dayAbout 11% a year
Wick saysA tiny 0.01% every 8 hours adds up to about 11% a year if you keep holding.

Recap: funding is a peer-to-peer payment every 8 hours that keeps perp and spot anchored. Positive funding means longs pay shorts. Negative funding means shorts pay longs.

Knowledge check

Answer before moving on.

0 / 3 answered

1. Who pays whom when the funding rate is positive?

2. What is the main purpose of the funding rate mechanism?

3. On a $10,000 long position at 0.01% funding, what do you pay each 8-hour funding cycle?

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