Funding

What is Funding?

Funding is a common feature of perpetual trading. It entails small, regular payments exchanged between traders with long and short positions. This mechanism helps keep the perpetual contract's price close to the asset's real market (spot) price.

A funding rate is calculated at regular intervals. The sign of the funding rate tells our system which side is “over-represented” or “under-represented”. When the rate is below zero, it means the contract is trading below the index price; shorts are effectively being subsidized to hold their position and must pay the funding fee to longs.

If the funding rate is positive, traders holding long positions pay those holding short positions.

If the funding rate is negative, traders holding short positions pay those holding long positions.

Why is Funding Important?

Perpetual contracts, unlike traditional derivatives, have no expiry date. Without expiration, there is no natural mechanism to force the contract price to align to the spot price. If the prices diverge too far, it can cause instability, making the product less useful, trustworthy and fair for users. When there is a large number of traders on either the long or short side, funding realigns the contract price with the spot price by making it more costly to remain in the majority trade. This stabilizes the market by preventing significant price deviations.

How is Funding Calculated?

Funding at Rails is a 3-step process as described below.

1

Premium Calculation

In financial trading, "premium" gauges the difference between long and short positions in a perpetual contract. It indicates the deviation of the perpetual contract's price from the spot index. Calculated every minute, the premium utilizes this formula:

$$\text{Premium} = \frac{\max\left(0, \text{Rails Bid Price} - \text{CCData Index Price}\right) - \max\left(0, \text{CCData Index Price} - \text{Rails Ask Price}\right)}{\text{CCData Index Price}}$$

Where $\text{Rails Bid Price}$ is the entry price of your trade and $\text{CCData Index Price}$ is pulled from CoinDesk's Aggregate Index API.

2

Funding Rate Calculation

The funding rate is determined hourly, using the 1-hour average premium. This average is computed from 60 individual premiums, calculated each minute as outlined in Step 1.

$$\text{Funding Rate} = \frac{\text{Average Premium}}{\text{Time Factor}} + \text{Interest Rate Component}$$

To prevent excessively high or negative funding payments, the funding rate is capped between a maximum and minimum funding rate. All parameters are defined here:

Parameter	Value	Description
Time Factor	1	This normalization factor adjusts the funding rate to match the time interval between funding payments (i.e. 1 hour), ensuring traders are charged or credited fairly for the actual period their positions are open.
Interest Rate Component	0.00125%	A fixed value added to the funding rate to reflect the cost of holding a leveraged position, similar to paying interest on borrowed capital.
Minimum Funding Rate	-0.04	This is the minimum funding rate value to prevent excessively negative funding rates.
Maximum Funding Rate	0.04	This upper bound is used to cap high funding rates.

3

Funding Value Calculation

The funding value is calculated hourly when the funding rate updates. Payments are instantly credited to your account after calculation. A negative Position Size is used for Short positions.

$$\text{Funding Value (Short)} = -1 \times \text{Position Size} \times \text{CCData Index Price} \times \frac{\text{Funding Rate}}{100}$$

$$\text{Funding Value(Long)} = \text{Position Size} \times \text{CCData Index Price} \times \frac{\text{Funding Rate}}{100}$$

Frequently Asked Questions

Are funding payments a fee Rails is charging me?

No. Funding payments are not fees. Funding is a balancing mechanism to ensure the perpetual futures contract price stays near the index price. Payments are made between traders only.

How frequently does funding occur?

Funding payments take place every hour. You can see the last funding rate calculation as well as when the next funding event will take place in the Market Data section of the main trading page.

Most platforms employ 8 hour funding windows, but there are key benefits to shortening that window. The main benefit is that it allows funding rates to react more quickly to real-time market conditions. This helps keep perpetual contract prices better aligned with spot prices, making trading more fair, stable, and accurate for users.

Where can I find my funding payment history?

Users can view their funding payments in one of three ways:

1. Open Positions: For active trades in the Positions tab, the realized P&L column reflects funding payments for that trade.
2. Account Summary: The funding row in the account summary contains the sum of all lifetime funding payments for each user.
3. Historical Payments: Individual funding payments for all historical trades can be found on the Portfolio page in the Funding tab.

How did you land on an interest rate component of 0.00125%

Most CEXs have 8 hour funding windows and use a standard interest rate of 0.01%. Since Rails does hourly funding, we apply a 0.00125% interest rate component to the funding value calculation to remain in-line with industry standards.