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.

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.

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.

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.

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

Market Dynamics & Trading Insights 🔗

Open Interest - Total number of contracts held by all market participants—indicates market sentiment and trading activity intensity. There's always a long for every short.

Premiums & Discounts:

  • Premium (perp > spot): Perpetual trading above spot price - longs pay shorts

  • Discount (perp < spot): Perpetual trading below spot price - shorts pay longs

  • The funding rate translates these premium/discount observations into actual payment amounts

  • Creates arbitrage opportunities for yield-seeking traders (cash and carry strategies)

Advanced Interpretation:

  • Positive funding ≠ always bullish sentiment - could indicate spot selling faster than perps

  • Negative funding ≠ always bearish sentiment - could indicate spot buying leading perps

  • Funding dislocations between funding rates and price action often signal significant moves

  • OI flushes tend to happen when OI rises while prices grind down - shows leveraged buying over spot

Funding incentivizes traders to take positions that align the perpetual price with the spot price, maintaining a stable and fair trading environment through economic incentives rather than forced settlement.

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