Funding rates explained
A perp never expires, so something else has to keep its price near the underlying. That job belongs to funding.
The question
Why does a perp need funding?
A perpetual future tracks an index price but has no expiry date. Without a settlement date, nothing forces the market price to meet the index. Funding is the payment between longs and shorts that pulls the two together.
Two prices
Mark price and index price
N1 uses two prices for each market.
- Index price. An external reference price for the underlying asset, from an oracle.
- Mark price. The market's own traded pricing. On an order-book market it comes from the best bid and ask. On an RFQ market, N1 asks designated makers for bid and ask prices at standard sizes. These sample requests never trade.
The gap between them is the premium. A positive premium means the perp trades above the index. A negative one means it trades below.
The rate
From premium to hourly rate
N1 calculates funding in four steps.
- Sample. Every few seconds, it measures the premium: mark price divided by index price, minus one. Each sample is capped, so one extreme reading has limited effect.
- Average. Over the hour, it averages those samples.
- Scale. It divides the average by 24. The premium is treated as a daily rate, and each hour takes one twenty-fourth of it.
- Cap. It caps the result again, which limits how far funding can move in one hour.
The capped hourly rate, multiplied by the index price, is added to a running total for the market called the funding index.
Who pays
Which side pays
When the premium is positive, longs pay shorts. When it is negative, shorts pay longs. Funding passes between positions.
Each account keeps the funding index from its last settlement. What you owe or receive is your position size times the change in the index since then. Accrued funding counts toward your account value and is settled into profit and loss.
If the index price goes a minute or more without an update, funding for that stretch is set to zero.
Worked example
One hour of funding on a $10,000 long
Illustrative numbers only.
| Index price | $100.00 |
| Average mark price over the hour | $100.24 |
| Average premium (100.24 ÷ 100 − 1) | 0.24% |
| Hourly rate (0.24% ÷ 24) | 0.01% |
| Position | Long 100 units, $10,000 |
| Funding for the hour (100 × $100 × 0.01%) | $1.00 paid to shorts |
If that premium held for a day, the long would pay about $24. If the mark sat below the index by the same amount, the long would receive it instead.
Why it works
How funding pulls the price back
Funding makes the crowded side pay. If most traders are long, the mark rises above the index and longs pay shorts. A trader or market maker holding the short side is paid to hold it, and the growing cost encourages longs to reduce. Both push the mark back toward the index.
Funding is not a substitute for liquidity. In a thin market it can become expensive while the prices stay apart.
In practice
What to check before holding a position
Funding matters more the longer you hold. On each N1 market page, the projected hourly rate and the next funding time show what holding costs right now. The rate is recalculated every hour, so treat it as a current reading, not a fixed price.
For example, see the funding rate on the BTC-USD perpetual, or on TCGX, the trading-card index perpetual, one of N1's Discovery Markets.
To add funding to the other costs of a position, see the all-in cost of a trade.
FAQ
Common questions
- What is a funding rate?
- It is the rate at which longs and shorts pay each other to keep a perpetual future's price close to its index. On N1 it is calculated hourly from the gap between the mark and index prices.
- Who pays funding, longs or shorts?
- When the mark price is above the index, longs pay shorts. When it is below, shorts pay longs.
- How often is funding calculated on N1?
- Every hour. The hourly rate is the average premium over the hour divided by 24, with caps on each sample and on the hourly result.
- Can a funding rate be negative?
- Yes. The sign follows the premium. A negative rate means the perp trades below the index and shorts pay longs.
- Does funding apply to RFQ markets?
- Yes. RFQ markets have no public order book, so N1 asks designated makers for bid and ask prices that never trade, and uses their midpoint as the market price for funding.
Sources
From the N1 docs
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