📈Funding rates

1. What are funding fees?

Funding fees are paid by traders on the dominant side of a market to the other side.

For example, for a given market, assuming there is $10M in long open interest (OI) and $5M in short OI, the traders holding long positions must pay traders holding short positions. This fee is calculated on a daily basis, and is settled when traders close their position.

2. What is the purpose of funding fees?

The purpose of funding fees is to encourage the balancing of OI between longs and shorts of a given market, thereby limiting the exposure of liquidity providers toward a specific direction.

For example, suppose the majority of traders are long on the Tokyo index and the index goes up. In that case, liquidity providers stand to lose a significant portion of their deposited funds. Funding fees help to prevent large liquidity provider losses from happening.

3. How are funding fees determined?

Funding fees are calculated and added to the P&L of all open traders once per day. To ensure sufficient protection for liquidity providers, funding fees increase exponentially as the open interest skew widens.