Funding Mechanism

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, and its sign determines who pays and who receives. A positive funding rate means the perpetual is trading above the index price, so traders holding long positions pay those holding short positions. A negative funding rate means the perpetual is trading below the index price, so traders holding short positions pay those holding long positions. This encourages traders to take the side that helps bring the perpetual's price back in line with the index price.

Funding is not a fee charged by Rails — it is paid automatically between traders:

• 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 perpetuals 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 our Index Price source data.

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 (in hours)	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.

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

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

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