Funding Rate (Perpetual Futures)

Perpetual futures (perps) have no expiry date — unlike traditional futures, they can be held indefinitely. To prevent the perp price from drifting far from the spot price, funding rate mechanisms transfer payments between long and short holders.

**How funding works:** - **Positive funding rate**: Perp price > spot price. Longs pay shorts. Cost to hold a long position. - **Negative funding rate**: Perp price < spot price. Shorts pay longs. Cost to hold a short position. - Funding is exchanged peer-to-peer: if you're long and funding is positive, your account is debited; short holders' accounts are credited.

**Funding rate calculation (Binance simplified):** Funding rate = Interest rate + Premium index - Interest rate: Fixed (0.01%) - Premium index: Based on the difference between mark price and index price

**Reading funding rates as a sentiment signal:** - Persistently high positive funding (above 0.1% per 8 hours): Market is heavily long, crowded trade, higher liquidation cascade risk - Persistently negative funding: Market is heavily short, potential short squeeze fuel - Negative funding during a bull market: Often a bullish signal (shorts paying longs despite rising price — bears exhausted)

**Funding rate arbitrage:** The "cash-and-carry" or basis trade: buy spot ETH + short ETH perp. Net exposure = 0, but you collect funding payments. This is "delta-neutral yield" or "funding rate farming." Risk: if funding flips negative, you'd pay instead of collect.