Funding rates are a foundational mechanism in perpetual swap trading, ensuring that the price of a perpetual contract stays closely aligned with the underlying asset’s spot price—despite having no expiration date. Unlike traditional futures, which naturally converge to spot prices at expiry, perpetual contracts rely on funding rates to maintain price equilibrium.
This article breaks down how funding rates work, how they're calculated on Vertex, and why traders must understand their impact on profitability and position management.
How Funding Rates Work
Perpetual contracts allow traders to maintain long or short positions indefinitely. To prevent the contract price from drifting too far from the real-world (spot) price of the asset, exchanges use funding rates as a balancing tool.
The core idea is simple:
👉 Discover how real-time market balance shapes your trading rewards.
When the mark price of a perpetual contract trades above the spot index price, the funding rate becomes positive. Longs then pay shorts.
When the mark price trades below the spot index price, the funding rate becomes negative. Shorts then pay longs.
This continuous transfer of funds creates economic incentives for traders to push the contract price back toward fair value.
Key Definitions:
- Mark Price: The internal price of the perpetual contract, derived using a time-weighted average price (TWAP) of the order book.
- Spot Index Price: The average spot price of the underlying asset across major exchanges.
- Funding Interval: On Vertex, this occurs every hour.
Funding payments are proportional to position size and occur only between traders—longs and shorts—within the same market.
Funding Rate Calculation on Vertex
Vertex uses a transparent and decentralized method to calculate funding rates, leveraging real-time data from Stork, a high-performance oracle network.
Inputs for Funding Rate:
- Spot Index Price
- Perpetual Contract Mark Price
- Funding Interval (hourly)
Formula:
- Funding Index = TWAP(Perp Mark Price) – TWAP(Spot Index Price)
- Funding Payment = Funding Index / 24
This means the hourly funding payment is derived from the daily funding index, divided into 24 hourly intervals.
To prevent extreme volatility, Vertex caps funding at 2% per day (approximately 0.083% per hour).
Oracle Data Sources and Price Aggregation
Accurate reference pricing is critical for fair funding calculations. Vertex relies on decentralized oracles—primarily Stork—to pull reliable spot index data.
Index Price Contributors
Multiple publishers feed price data into Stork. While each publisher may use different methodologies, Vertex aggregates this data to determine a robust index price.
Aggregation Methods:
- Dexterity: Uses the median of order book mid-prices from supported exchanges.
- Other Publishers: Use the median of last traded prices.
Supported Exchanges (USD/BUSD Markets):
- Binance
- Coinbase Pro
- Kraken
For USDT-based markets, Vertex converts prices to USD using Binance’s USDT-BUSD rate. Supported USDT exchanges include:
- Binance
- OKX
- ByBit
- Kucoin
- Bitfinex
This multi-source approach enhances data resilience and reduces manipulation risk.
Positive Funding Rates Explained
A positive funding rate occurs when the perpetual contract trades at a premium to the spot price.
Positive Funding Rate = Perpetual Mark Price > Spot Index Price
In this scenario, long-position holders pay short-position holders.
Why It Happens
Bullish sentiment often drives demand for long positions, pushing the perpetual price above fair market value. The positive funding rate acts as a corrective mechanism: it makes holding longs more expensive, discouraging further buying and encouraging shorts.
Real-World Example:
Assume:
- ETH Spot Price = 1,000 USDC
- ETH Perpetual Mark Price > Spot → Funding Rate = +0.1% per day (36.5% annualized)
- Alice holds a 10 ETH long position (10,000 USDC notional)
- Leverage = 10x
- Funding Interval = Hourly
Alice pays:
(0.001 × 10,000) / 24 ≈ 0.426 USDC per hour
Over time, persistent positive funding can significantly eat into profits—even turning winning trades unprofitable if held too long.
👉 See how smart traders turn funding dynamics into profit opportunities.
Negative Funding Rates Explained
A negative funding rate occurs when the perpetual trades at a discount to the spot price.
Negative Funding Rate = Perpetual Mark Price < Spot Index Price
Here, short-position holders pay long-position holders.
Why It Happens
Bearish sentiment increases shorting activity, dragging the perpetual price below spot value. The negative rate penalizes shorts and rewards longs, incentivizing price convergence upward.
Real-World Example:
Same parameters as above, but now:
- Funding Rate = –0.1% per day
- Alice’s 10 ETH long position now receives funding
She earns approximately 0.426 USDC per hour from short traders.
This not only reduces her holding costs but can enhance overall returns—especially during prolonged bear markets where negative funding persists.
Why Funding Rates Matter for Traders
Understanding funding rates is essential for:
- Position Sizing: Larger positions amplify funding payments.
- Holding Periods: Long-term holds are heavily influenced by cumulative funding.
- Strategy Design: Arbitrageurs and yield-focused traders often target favorable funding environments.
- Risk Management: Unexpected shifts in funding can impact liquidation risk.
Because funding is calculated on notional value (not margin), leverage magnifies its effect on PnL.
Historically, crypto perpetual markets have seen extended periods of positive funding—sometimes lasting months—especially during bull runs. But sustained negative funding also occurs during deep corrections.
Frequently Asked Questions (FAQ)
Q: Do I pay or receive funding if I close my position before the hourly interval ends?
A: No. Funding is only exchanged if you hold a position at the moment the interval settles. Closing before settlement avoids that cycle’s payment.
Q: Can funding rates predict market direction?
A: Not reliably. High positive funding may signal bullish sentiment, but it can also indicate over-leveraged longs vulnerable to liquidation. Always combine with technical and on-chain analysis.
Q: Are funding payments guaranteed?
A: Yes, as long as you have an open position when the hourly interval closes. Payments are automatically settled between counterparties via the protocol.
Q: What happens if funding exceeds 2% per day?
A: Vertex caps funding at 2% daily to prevent excessive cost distortions. Even under extreme divergence, payments won’t exceed this threshold.
Q: How often are funding rates updated?
A: The rate is recalculated every hour based on TWAPs of mark and spot prices during that window.
Q: Does funding apply to spot or futures with expiry?
A: No. Funding is unique to perpetual contracts. Traditional futures converge at expiry; spot trading incurs no such fee.
Strategic Takeaways for Traders
Funding rates are more than just a cost of carry—they’re a pulse check on market sentiment and positioning.
Traders who monitor funding trends can:
- Avoid entering longs during extreme positive funding spikes.
- Capture yield by holding longs when funding turns negative.
- Exploit convergence trades when divergence widens abnormally.
👉 Master market timing with real-time funding insights and advanced analytics.
Vertex’s transparent, oracle-backed model ensures fairness and reliability in every funding cycle—making it easier for traders to plan and execute with confidence.
Whether you're scalping hourly moves or holding positions for weeks, integrating funding rate awareness into your strategy isn’t optional—it’s essential.