The Funding Rate is used essentially to force convergence of prices between the Perpetual Futures Market and the actual underlying commodity: in this case, BTC denominated in USDT. In this section, we define the Funding Rate, its constituent components, and how it is used. To learn why a Funding Rate is needed in the Perpetual Futures Market, please review the section detailing the market.
Funding occurs every 8 hours at X times. Traders are only liable for funding payments in either direction if they have open positions at the pre-specified funding times. If traders do not have a position, they are not liable for any funding.
Funding is calculated as:
Funding Amount=Nominal Value of Positions×Funding Rate
Note, all funding calculations are inclusive of leverage. In other words, at the maximum 1-125 leverage, your funding amount (either positive or negative) could potentially be 125x your collateral amount. If the rate is positive, longs pay short, and if negative, shorts pay longs.
There are two components to the Funding Rate: the Interest Rate and the Premium. The Premium particular is why the price of the Perpetual Contract will converge with the price of the underlying instrument.
Binance uses a flat interest rate component, with the assumption that holding cash equivalent returns a higher interest than BTC equivalent. The difference is stipulated to be 0.03% per day by default (0.01% per funding interval)* and may change depending on market conditions such as the Federal Funds Rate. Any changes to this rate will be announced in advance.
* The interest rate of LINK/USDT, LTC/USDT and BNB/USDT perpetual contracts is 0%.
There may exist a significant difference in price between the Perpetual Contract and the Mark Price. In such instances, a Premium Index will be used to enforce price convergence between the two markets. It is calculated separately for every instrument, and the formula is below:
Premium Index(P)=Max(0,Impact Bid Price−Mark Price)−Max(0,Mark Price−Impact Ask Price)/Spot Price
Impact Bid Price=The price to Buy the Notional Impact
Impact Ask Price=The price to Sell the Notional Impact
The Notional Impact is the amount in USDT available to trade with 200 USDT worth of margin; at default levels, this is 4,000 USDT.
Binance calculates the Premium Index every second, and takes a Time-weighted average across all indices to the Funding Time.
The Funding Rate formula itself is:
Funding Rate (F) = Premium Index (P) + clamp(0.01% - Premium Index (P), 0.05%, -0.05%)
In other words, as long as the Premium Index is between -0.04% to 0.06%, the Funding Rate will equal 0.01% (the interest rate).
If (Interest Rate (I) - Premium Index (P)) is within +/-0.05% then F = P + (I - P) = I. In other words, the Funding Rate will be equal to the Interest Rate.
The Funding Rate is then applied to the trader’s nominal position to compute their total payout (either positive or negative) at funding time. This is simply Funding Rate × Nominal Position. Note again that as nominal position can be up to 125 times margin, this can be a relatively large amount.
There are two caps on the Funding Rate to ensure leverage can be achieved, and market behaviour is stable.
Important note: Binance takes no fees for Funding Rate transfers; these are directly between traders.