Funding Fee Explained: How Perpetual Futures Funding Works

Perpetual futures come with a funding fee. What is it, and what do you need to know about it?

What is a funding fee?

A funding fee is a payment that long and short holders of a perpetual futures contract make to each other. When the funding rate is positive, longs pay shorts; when it is negative, shorts pay longs.

The exchange does not earn anything from funding fees. They are exchanged directly between position holders.

Funding is exchanged in proportion to position size, and you only pay or receive it if you hold a position at the settlement time.

Funding exists only on perpetual futures. Spot markets and dated futures don't have it.

Why do funding fees exist?

Regular futures have an expiry date, and as it approaches, the futures price converges with the spot price.

Perpetual futures never expire, so that mechanism doesn't work.

Left alone, the futures price could drift far from the spot price.

That is where the funding fee comes in.

Under the funding mechanism, when the futures price is above spot, long holders pay short holders.

Conversely, when spot is above the futures price, short holders pay long holders.

This creates gains for one side and costs for the other, which in the end nudges the futures price toward spot.

How is the funding rate set?

Global exchanges such as Binance, Bybit and Hyperliquid share the same basic funding rate formula.

$$\\text{Funding rate} = \\text{Premium index} + \\text{clamp}(\\text{Interest rate} - \\text{Premium index}, -0.05\%, +0.05\%)$$

• Interest rate: 0.03% per day by default, or 0.01% per 8 hours.
• Premium index: how far the futures price sits from spot (or the market's average price).
• Clamp: if the gap between the interest rate and the premium is within ±0.05%, the rate snaps to the interest rate. That is why the 8-hour funding rate so often sits near 0.01% in calm markets.

Funding rates have upper and lower caps. Settlement intervals may also change when price swings and deviations grow large.

How is the actual fee calculated?

Funding applies to your whole position, not to your margin. At each settlement you pay or receive the position value multiplied by the funding rate.

Say you post 1,000 USDT of margin at 10x leverage and hold a 10,000 USDT long. With a funding rate of +0.01% every 8 hours, the numbers work out like this.

0.01% may look tiny. But at 10x leverage it becomes 0.1% of your margin.

In other words, every 8 hours you may pay or receive an amount equal to 0.1% of your margin.

When is funding settled, and how often?

The default funding interval is 8 hours. Futures exchanges such as Binance and OKX settle at 00:00, 08:00 and 16:00 UTC.

Some contracts charge funding every 1, 2 or 4 hours, which you can check separately on each asset's tab.

Hyperliquid, a decentralized exchange (DEX), settles funding every hour.

Does funding affect your liquidation price?

Yes. In isolated margin mode, funding is deducted from that position's margin; in cross margin mode, it comes out of your account balance.

When you pay funding, the margin balance of the position or account shrinks, so the position can be liquidated sooner than before.

Conversely, when you receive funding, your liquidation price can move in your favor.

FAQ

Can I open a position just to collect funding?

You can. But if the price moves against your position after you collect funding, you could take a large loss.

You also need to factor in the fees for opening and closing the position.

If I close right before settlement and reopen right after, do I skip the funding fee?

Yes. But you pay fees to close and reopen the position, and orders pile up around settlement time, so slippage can widen.

Is the funding rate shown on screen what gets applied at settlement?

On most exchanges the displayed figure is an estimate that keeps changing until the next settlement, so the final settled rate can differ slightly.