Funding rates explained
Understand who pays funding, how to calculate a payment, why rates change, and how N1 applies its hourly funding formula.
Funding is a payment between the long and short sides of a perpetual market. It helps create incentives for the contract's traded price to stay near its reference price even though the contract has no scheduled expiry.
A positive funding rate means longs pay shorts; a negative rate means shorts pay longs. The rate, calculation, and payment interval depend on the venue and market. For someone holding a position, funding can be a cost or a receipt in addition to trading profit or loss.
Why does a perpetual need funding?
A futures contract with an expiry has a scheduled settlement process. A perpetual has no such date, so its market price can remain above or below the underlying reference. Funding changes the cost of holding each side and encourages participants to respond to that gap.
If buying pressure pushes the contract above its reference, a premium-based funding mechanism can make holding a long more expensive and holding a short more attractive. This can encourage trades that narrow the gap. It does not guarantee convergence: limited liquidity, risk, and trading costs can keep prices apart.
The number of people on each side does not determine the rate. In a matched-contract market, one large short can face many smaller longs. What matters for a premium-based calculation is the pricing relationship, not a headcount of traders.
Work out the payment
For a simple linear perpetual, funding for an interval is commonly expressed as position notional at the specified reference price multiplied by the interval's funding rate. Check the contract's formula and which price it uses.
Suppose an illustrative $10,000 long faces a positive rate of 0.01% for one funding interval. The payment is $1: $10,000 × 0.0001. Under the same assumptions, a $10,000 short receives $1. If the rate were −0.01%, the direction would reverse.
| Position | Funding rate for the interval | Payment |
|---|---|---|
| $10,000 long | +0.01% | Pays $1 |
| $10,000 short | +0.01% | Receives $1 |
| $10,000 long | −0.01% | Receives $1 |
The interval matters. A rate quoted per hour cannot be compared directly with one quoted for eight hours. Position notional and future rates can also change, so multiplying today's payment by a long holding period gives a scenario, not a known total cost.
How N1 calculates funding
N1's funding formula starts with the premium between mark and index prices: mark divided by index, minus one. It caps individual samples, averages them over an hour, divides that average by 24, and applies an hourly cap.
The resulting hourly rate, multiplied by the index price at funding time, updates a market funding index. An account's payment or receipt depends on its position size and the change in that funding index since its last settlement.
For illustration, assume the index stays at $100 and the mark stays at $100.24 over an hour, with neither cap binding. The premium is 0.24%. Dividing by 24 gives an hourly funding rate of 0.01%. A long of 100 units has $10,000 notional and pays $1 for that hour.
N1 uses non-executable pricing samples from makers for RFQ markets. These observations measure a premium; they are not trades or quotes reserved for a user's order. The specification also describes missing samples and outage handling.
Funding and account health
Funding affects the value supporting an open position. Payments can reduce the margin buffer even when the market price changes little; receipts do not remove the position's price risk.
An expected funding receipt also does not make a trade profitable by itself. Entry and exit prices, fees, changing rates, and liquidation can outweigh it. The all-in cost of a trade puts funding alongside execution costs.
What to check before holding a position
- The rate's sign and the interval it covers.
- Whether the displayed rate is projected or already settled.
- The reference price and position size used in the calculation.
- The payment schedule and your account's remaining margin.
On N1's market pages, the projected hourly rate is an estimate for the current period. It can change before the final calculation. For payments already applied, use account funding history rather than extending the current projection backward.
Sources
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