What is the Funding Rate?

The Funding Rate consists of two main parts: the Interest Rate and the Premium / Discount. This rate aims to keep the traded price of the perpetual contract in line with the underlying reference price.

Interest Rate Component 

Every contract consists of two instruments: a Base currency* and a Quote currency*. For example, on BTC-USD, the Base currency is BTC while the quote currency is USD. The Interest Rate is a function of interest rates between these two currencies: 

Interest Rate (I) = (Interest Quote Index - Interest Base Index) / Funding Interval

where,

Interest Base Index = The Interest Rate for borrowing the Base currency 

Interest Quote Index = The Interest Rate for borrowing the Quote currency

Funding Interval = 3 (Since funding occurs every 8 hours)

Premium / Discount Component 

The perpetual contract may trade at a significant premium or discount to the Last Price. In those situations, a Premium Index will be used to raise or lower the next Funding Rate to levels consistent with where the contract is trading. Each contract’s Premium Index is available on the specific instrument’s Contract Specifications page.

Note: CoinDCX doesn’t charge any funding fees from its users. There is no interest rate on keeping the position open indefinitely in Perpetual contracts. The payments are directly interchanged between the buyer and the seller.

*Glossary

Base currency/Settlement currency: This is the currency in which the P&L of a Futures position is calculated. In our example, the base currency is the same as the quote currency, i.e. LTC. However, this need not always be true.

Quote currency: This is the currency in which the price of the underlying is quoted. In our example, the price of LTC is quoted in BTC terms. Hence, quote currency is BTC.

To learn about more such glossaries, click here.