What is a funding rate?

Funding rates are periodic amounts of an asset paid between short and long traders that hold perpetual contracts positions. The reason for funding rates is that perpetual futures contracts, as their name suggests, can be held indefinitely without expiry.

What does a positive funding rate mean?

When the Funding Rate is positive, the price of the perpetual contract is usually higher than the mark price. Thus, traders who are long pay for short positions. Conversely, a negative Funding Rate means that short positions pay for longs. Funding Rates are paid peer-to-peer.

What does a negative funding rate mean?

Thus, traders who are long pay for short positions. Conversely, a negative Funding Rate means that short positions pay for longs. Funding Rates are paid peer-to-peer. Therefore, Binance takes no fees from Funding Rates as they happen directly between users.

Why do exchanges use funding rates?

Since perpetual futures contracts never settle, exchanges use Funding Rates to ensure that futures prices and index prices converge on a regular basis. Funding Rates are periodic payments made to or by traders who are long or short based on the difference between perpetual contract markets and spot prices.