**Funding Mechanism**

The funding mechanism refers to a process used in derivative markets, particularly in perpetual swap contracts, to maintain the perpetual swap contract price in alignment with the spot market price of the underlying cryptocurrency.

**What is Funding? **

Funding refers to the mechanism by which traders pay or receive periodic interest payments to maintain open positions. It is primarily associated with trading instruments like perpetual swap contracts, commonly used in cryptocurrency exchanges. Unlike traditional futures contracts, perpetual swap contracts do not have an expiry date. Instead, they aim to maintain a price close to the spot price of the underlying asset through the funding mechanism. When the funding rate is positive, traders who hold long positions pay funding to traders who hold short positions.

Conversely, when the funding rate is negative, traders who hold short positions pay funding to traders who hold long positions. Funding payment only applies to traders holding positions at specific funding timestamps. Funding fees are transferred directly between position holders without additional platform costs.

**Calculation of Funding Fee**

Funding fees are calculated as below:

*Funding Fee = Notional Value of Positions * Funding Rate*

*Notional Value of Positions = Quantity of Contract * Mark Price*

For example, suppose the trader has a long position of 10 BTC for BTCUSDT Perpetual Swaps. Since the current time is 8:00 UTC, funding occurs between users holding the position.

*Notional Value of Position *

*= Quantity of Contract * Mark Price*

*= 10 * $38,000*

*= $380,000*

*Funding Fee *

*= Notional Value of Positions * Funding Rate*

*= 380,000 * 0.01%*

*= $38*

Since the funding rate is positive, the user holding the long position has to pay the $38 funding fee.

Note: The funding fee calculation is subject to change so as to ensure funding fee stability.

**Calculation of Funding Rate**

Funding Rate has two key constituents: Interest Rate and Premium Index.

**Interest Rate (=I)**

Interest Rate is a function of the interest rates between two currencies. For instance, the interest rate for BTCUSDT should account for the difference in interest rates between BTC and USDT.

The formula is as below:

*Interest Rate(I) = (Interest Quote Index - Interest Base Rate)/Funding Interval*

*Interest Quote Index = The interest rate for borrowing the quote currency**Interest Base Index = The interest rate for borrowing the base currency**Funding Interval = 24h/8h = 3*

Note: Flipster uses a flat interest rate component. This means Flipster assumes the difference between Interest Quote Index and Interest Base Index at 0.03% per day by default (0.01% per 8 hour funding interval). The interest rate component is subject to change so as to ensure funding fee stability.

**Premium Index (=P)**

Perpetual swaps can trade at a premium or discount from the Mark Price. Premium Index gauges how much the perpetual swap price deviates from the Mark Price.

The formula is as below:

Premium Index = [ Max(0, Impact Bid Price – Index Price) – Max(0, Index Price – Impact Ask Price) ] / Index Price

- Impact Bid Price = The average fill price to execute the Impact Margin Notional on the Bid side
- Impact Ask Price = The average fill price to execute the Impact Margin Notional on the Ask side

**Funding Rate Formula**

*Funding Rate = Avg(P) + clamp[Avg(I) - Avg(P), 0.05%, -0.05%]*

*Avg(x) is defined as time-weighted average of x for the 8-hour moving window: *

*Avg(x) = (1 * x(1) + 2 * x(2) + ... + 480 * x(480) ) / (1 + 2 + ... + 480) where x(1) is the value at the first minute.**For example, Premium Index(5) denotes the premium at the fifth minute of an 8-hour window.*

Note: [Avg(I) - Avg(P)] has a damper of +/-0.05%. Therefore, [Avg(I) - Avg(P)] is within +/-0.05%, then Funding Rate = P + (I - P) = I. On the other hand, if Avg(P) goes up or down excessively, the funding rate can be adjusted to Avg(P) + 0.05% / Avg(P) - 0.05% to promote the convergence between the market price of a perpetual swap and its mark price Funding rate.

**Funding Rate Cap**

To ensure the stability of the trading system, Funding Rate has cap/floor rates, to satisfy the condition below:

*| Funding Rate | ≤ 75% * Maintenance Margin Rate*

*For example, let’s calculate the funding rate cap/floor of the ETHUSDT perpetual swap.**Maintenance Margin Rate = 0.5%**Using the condition, | Funding Rate | ≤ 75% * 0.5% = 0.375%*

Calculating the funding rate, the funding rate cap/floor of the current ETHUSDT perpetual swap is as follows:

*-0.375% ≤ Funding Rate ≤ 0.375%*

Note: Due to the intricacies of the funding fee settlement system, approximately 5 seconds are required to complete the funding fee exchanges between traders on the platform. Opening/Closing a perpetual swap position within 5 seconds (before or after) of a funding timestamp does not ensure eligibility. Please be informed that Flipster does not provide nor offer compensation in such circumstances.

Note: Flipster reserves the right to adjust the funding rate cap and floor parameters in extreme market conditions.