Funding rate

Perpetual futures have no expiry date, so exchanges need another way to tie them to the underlying market. At fixed intervals, commonly every eight hours, traders on one side pay those on the other. When the perpetual trades above spot the rate is positive and longs pay shorts; when it trades below, the rate turns negative and shorts pay longs.

The rate is calculated from the gap between the contract and an index price, plus a small interest component, and is paid between traders rather than to the exchange. Analysts watch funding as a gauge of positioning: persistently high positive rates point to crowded leveraged longs, while deeply negative rates signal heavy shorting. Basis traders, and Ethena's USDe, earn funding by holding spot and shorting perpetuals.

Funding is small per period but compounds: 0.01% every eight hours is about 11% a year. Rates can flip quickly, so a profitable carry trade can turn costly, and extreme readings often come before sharp reversals or liquidation waves.