How Perpetual DEXs Work · Perpetual Contracts · 2/4
Funding Rates Explained
Funding rates are the heartbeat of perpetual futures markets. They determine who pays whom and they keep prices aligned. If you understand funding rates deeply, you understand the economic engine behind every perp DEX — and one of the most important settings in any market you operate.
How Funding Rates Are Calculated
At its core, the funding rate measures the premium or discount of the perpetual price relative to the spot (index or oracle) price. The formula varies by platform, but the general structure is:
Premium = (Perp Price - Oracle Price) / Oracle Price
Most venues then add an interest rate component and clamp the result. Hyperliquid follows the CEX-style formula, expressed as an 8-hour rate (Funding docs):
Funding Rate (8h) = Average Premium + clamp(Interest Rate - Average Premium, -0.05%, +0.05%)
- The interest rate is fixed at 0.01% per 8 hours.
- The premium is measured with impact prices (the average fill price for a set notional on each side of the book) against the oracle, sampled every 5 seconds and averaged over the hour.
- Funding is paid every hour at one-eighth of the 8-hour rate, and is capped at 4% per hour.
For example, if the BTC oracle is $60,000 and the impact bid is $60,012:
- Premium = $12 / $60,000 = 0.02%
- Clamp term = clamp(0.01% − 0.02%, −0.05%, +0.05%) = −0.01%
- 8-hour funding rate = 0.02% − 0.01% = 0.01%, paid as 0.00125% each hour
Notice what the clamp does: whenever the premium is within ±0.05% of the interest rate, the funding rate lands exactly on the interest rate.
Long/Short Dynamics
The funding rate reflects the balance of demand between longs and shorts:
Positive Funding (most common in bull markets):
- More traders want to go long than short
- Perp price trades at a premium to spot
- Longs pay shorts
- This is the "cost of being bullish"
Negative Funding (common during crashes):
- More traders want to short (fear, hedging)
- Perp price trades at a discount to spot
- Shorts pay longs
- This is the "cost of being bearish"
Near-baseline Funding:
- Supply and demand roughly balanced
- Perp price tracks spot closely
- On venues with an interest component, longs still pay the small baseline rate
Why Funding Is Usually Positive
On venues that use this formula, funding is positive most of the time partly by construction: with no premium at all, the interest component alone makes longs pay shorts 0.01% per 8 hours — about 11.6% APR on Hyperliquid. A sustained discount is needed to push funding negative.
Long-biased demand adds to this in bull markets, but it is not the whole story. On Hyperliquid between April and September 2026, hourly funding was positive in about 81% of hours for BTC, 84% for ETH and 89% for HYPE — and in 46%, 55% and 71% of hours respectively it sat exactly at the baseline rate. Average funding over that period annualized to roughly 5.8% (BTC), 6.5% (ETH) and 9.5% (HYPE), all below the 11.6% baseline. (Computed from the public fundingHistory endpoint of the info API; past funding says nothing about future funding.)
The Math of Funding Payments
Let's work through a concrete example:
You hold a $100,000 long BTC-PERP position on Hyperliquid. The current 8-hour funding rate is +0.01%.
- Payment per 8 hours: $100,000 x 0.01% = $10 (paid as $1.25 each hour)
- Daily cost: $30
- Annual cost if the rate never changed: $30 x 365 = $10,950, or ~11% of your position
Funding is charged on position notional, not on margin. On Hyperliquid the notional is computed with the oracle price, not the mark price. For a leveraged long, this is a constant drag that is easy to overlook.
Funding on Different Platforms
Not all funding mechanisms are identical:
| Platform | Funding Interval | Mechanism |
|---|---|---|
| Hyperliquid | Every hour (1/8 of the 8h rate) | Impact-price premium + interest, clamped; capped at 4%/hour (docs) |
| Hyperliquid HIP-3 | Every hour | Mid-price premium; deployer sets funding multiplier, interest rate and clamp (funding, deployer actions) |
| dYdX | Every hour | Premium averaged over the hour + interest (0% default for cross markets) (docs) |
| Binance | Usually 8 hours | Premium + interest (0.01% per interval), clamped (FAQ) |
If you deploy a HIP-3 market, the funding multiplier, interest rate and clamp are your levers: set them too weak and the perp can drift from your oracle; set them too strong and you make holding positions needlessly expensive.
Funding and the Basis Trade
If funding is positive, someone who is short the perp receives it. Being naked short exposes you to price risk, so some traders short the perp while holding an equal amount of spot. Spot and perp moves offset each other, and the position collects funding while it lasts.
This is the basis (or carry) trade, and it matters to operators because these traders supply the shorts that pull a premium back toward the oracle. It is not risk-free: funding can turn negative, spot and perp prices can drift apart, and fees, borrowing costs and liquidation risk on the perp leg all apply.
Key Takeaways
- Funding rates are periodic payments that anchor perp prices to the oracle/index
- Positive funding means longs pay shorts; negative means shorts pay longs
- On venues with an interest component, funding sits at a small positive baseline unless a premium or discount pushes it away
- Funding is a real cost for directional traders and the incentive that draws arbitrageurs in
- Platforms differ in interval, formula and caps — and HIP-3 deployers choose some of these parameters themselves