# 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.&#x20;
