Understanding Funding Fees in Perpetual Futures

Funding fees are a core mechanic of perpetual futures trading. They help keep the price of the perpetual contract aligned with the spot market and ensure a balanced trading environment between long and short positions. Here’s a complete explainer.

1. What Are Funding Fees?

Funding fees are periodic payments exchanged directly between traders holding long and short positions in a perpetual futures contract.
 Unlike traditional futures, perpetual contracts do not expire—so funding fees are used to keep their price close to the underlying asset’s spot price.

• Longs pay shorts when the market is trading at a premium

• Shorts pay longs when the market is trading at a discount
  

The exchange simply facilitates the transfer; it does not take a cut.

2. How Often Are Funding Fees Charged?

The funding fee timing depends on the specific token pair.     

                      
You only pay or receive funding if you hold an open position at the exact funding timestamp.

3. How Are Funding Fees Calculated?

The funding amount for each position is based on:

A. Nominal Value of Your Position

For INR-margined contracts:

Nominal Value = Mark Price × Contract Size

B. Funding Rate

The funding rate is determined by:

• Interest Rate Component

• Premium/Discount Component
  

When perpetual prices deviate significantly from spot prices, the premium index adjusts the next funding rate to bring them closer together.

Funding Fee Formula Simplified:

Funding Fee = Nominal Value × Funding Rate

4. When Do You Pay Funding Fees?

You are liable to pay or receive funding fees only if you have an open position—long or short—at the funding timestamp.

• If you close your position before the funding time, you will not pay or receive any fee.

• If you open a position after the funding time, the next funding cycle will apply.
  

5. Who Pays and Who Receives Funding Fees?

Funding fees depend entirely on the funding rate, which reflects market sentiment.

A. Positive Funding Rate → Longs Pay Shorts

This happens when:

• The perpetual contract trades above the spot price

• Market sentiment is bullish
  

Long position holders pay
Short position holders receive

Why?
Because longs are dominant and pushing the perpetual price higher, the mechanism discourages excessive bullish leverage.

B. Negative Funding Rate → Shorts Pay Longs

This happens when:

The perpetual contract trades below the spot price

• Market sentiment is bearish
  

Short position holders pay
Long position holders receive

Why?
 Because shorts are dominant and pulling the perpetual price lower, the mechanism incentivizes long exposure.

6. Key Points to Remember

• Funding fees are trader-to-trader transfers, not exchange charges.

• You pay or receive funding only if your position is open at the funding time.

• Funding depends on the funding rate, not on price direction alone.

• Closing your position before funding time avoids any fee.

• Funding applies regardless of whether your position is in profit or loss.