Funding

Funding rates are a critical mechanism in crypto perpetual contracts, ensuring that the perpetual contract price remains closely aligned with the underlying asset's spot price. On Hyperliquid, funding is designed to be peer-to-peer, transparent, and reflective of real market conditions.

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Overview of Funding 📈

• Peer-to-Peer Payments: Funding involves direct payments between traders—longs pay shorts or vice versa. The platform does not collect any fees from these payments.

• Hourly Settlements: Funding is accrued and paid every hour, providing consistent adjustments to the market.

• Base Interest Rate + Premium: The funding rate is computed as the sum of:

  1. A fixed interest rate of 0.01% every 8 hours applies, representing the cost difference between borrowing USD or cryptocurrencies. This corresponds to approximately 0.00125% per hour and an APR (Annual Percentage Rate) of ~11.6%.

  2. A premium/discount component, which reflects the difference between the perpetual contract price and the oracle-derived spot price of the asset.

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Funding Rate Calculation 🧮

The funding rate formula is:

F = Average Premium Index (P) + clamp(Interest Rate - Premium Index (P), -0.0005, 0.0005)

• Premium Index (P): Reflects the difference between the impact price (calculated using order book depth) and the oracle price.

  • Sampling: The premium is sampled every 5 seconds and averaged over the hour

• Clamp: Limits extreme differences between the interest rate and the premium index.

Impact Price Calculation:

impact_price = max(impact_bid_px - oracle_px, 0) - max(oracle_px - impact_ask_px, 0)

Where:

• impact_bid_px / impact_ask_px = Average execution prices to trade a specified notional amount on the bid and ask sides.

• oracle_px = Weighted median of prices submitted by validators, ensuring accuracy and robustness.

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Key Points 💡

• Oracle-Driven Calculations: The spot oracle price, derived from a weighted median of validator submissions, is fundamental in calculating the funding rate. Validators’ weights depend on their stake and the liquidity of the CEX they monitor.

• Funding Impact Notional: The impact notional used for funding calculations depends on the asset:

  • 20,000 USDC for BTC and ETH.

  • 6,000 USDC for all other assets.

  For example, a 50,000 USDC BTC position pays funding only on the first 20,000 USDC.

• Caps on Funding Rates: Funding on Hyperliquid is capped at 4% per hour, a much less aggressive cap than many centralized exchanges.

• Payments Formula: Funding payments are settled as:

  Payment = position_size × oracle_price × funding_rate

  The oracle price, not the mark price, is used to calculate the notional value for funding payments.

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Example Calculation 📝

1. Scenario:

   • Interest Rate = 0.01%

   • Impact Bid Price = $10,100

   • Spot Oracle Price = $10,000

   • Position Size = 10 contracts (each representing 1 BTC)

2. Step 1: Calculate Premium Index (P):

   Premium = (Impact Bid Price - Spot Oracle Price) / Spot Oracle Price
   Premium = ($10,100 - $10,000) / $10,000
   Premium = 0.01 (1%)

3. Step 2: Clamp the Difference:

   Clamped Difference = min(max(Interest Rate - Premium, -0.05%), 0.05%)
   Clamped Difference = min(max(0.01% - 1%, -0.05%), 0.05%)
   Clamped Difference = -0.05%

4. Step 3: Calculate Funding Rate (F):

   Funding Rate = Premium + Clamped Difference
   Funding Rate = 1% + (-0.05%)
   Funding Rate = 0.95%

5. Step 4: Compute Payment:

   Payment = Position Size × Oracle Price × Funding Rate
   Payment = 10 × $10,000 × 0.0095
   Payment = $950

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Why Funding Matters 🔗

Funding incentivizes traders to take positions that align the perpetual price with the spot price. This price convergence mechanism maintains a stable and fair trading environment for all participants. Hyperliquid's funding model closely mirrors centralized exchanges but adds decentralization and transparency, making it uniquely robust.