Funding Rate and Payment

Introduction

The funding payment is a periodic transfer of margin between longs and shorts in a perpetual futures contract. Because perpetual futures have no expiry, the contract price does not naturally converge to the underlying asset price that the contract is designed to track. The funding payment ensures the perpetual future’s price anchors itself to the index price.

A user’s funding payment is determined by the funding rate and the size of their open position. When the contract is trading above the index price, the funding rate is positive (i.e., longs pay shorts), incentivizing traders to switch from long to short (or at least close their long). When the contract is trading below the index price, the funding rate is negative (i.e., shorts pay longs), incentivizing traders to switch from short to long (or at least close their short).

\text{Funding Payment} = \text{Position Size} \times \text{Index Price} \times \text{Funding Rate}

*Position size is negative for short positions.

**Negative funding payment means a user is receiving the payment.

Funding payments consist of transfers of margin between longs and shorts positions. Synchronicity Exchange does not receive any fees on funding payments.

Calculating the Funding Rate

At the top of every hour, Synchronicity Exchange calculates the funding rate and executes the funding payment. Synchronicity Exchange automatically subtracts or adds funding rate payments to or from users’ accounts every hour.

The funding rate is calculated from an average of the premium index over the past hour, the current premium index and a fixed interest rate of 0.03% a day (i.e., 0.00125% an hour, 0.01% per 8 hours).

The premium index is derived from impact prices and the index price. Impact prices represent the fair value of the perpetual contract based on the current state of the order book.

The impact bid price is the clearing price resulting from selling contracts using $200 of margin at the maximum leverage allowed for the market.
The impact ask price is the clearing price resulting from buying contracts using $200 of margin at the maximum leverage allowed for the market.

Synchronicity Exchange calculates the premium index as the difference in distances between the index price and the impact prices of the perpetual market relative to the index price, reflecting whether the perpetual is trading at a premium or discount relative to the underlying spot index and by how much.

\text{Current Premium Index } = \frac{ \max(0, \text{Impact Bid Price} - \text{Index Price}) - \max(0, \text{Index Price} - \text{Impact Ask Price}) }{ \text{Index Price} }

The average premium is calculated as a simple average of the premium index values over the past hour, measured every 30 seconds (i.e., 120 indices per funding rate calculation).

\text{Average Premium Index} = \frac{ \sum\text{Premium Index} }{ \text{Premium Indices Polled} }

Therefore, the funding rate calculation is as follows:

\text{8-Hour Funding Rate} = \operatorname{clamp}\Big( \text{Average Premium Index } + \operatorname{clamp}\big( \text{Interest Rate} - \text{Current Premium Index }, 0.05\%, -0.05\%\ \big), 36\%, -36\%\ \Big)

\text{Hourly Funding Rate} = \frac{\text{8-Hour Funding Rate}}{8}

Note, $\operatorname{clamp}(x, \max, \min)$ restricts a value, $x$ , within upper and lower bounds. For example, $\operatorname{clamp}(0.06\%, 0.05\%, -0.05\%) = 0.05\%$ .

The inner clamp in the funding rate calculation bounds the effect of short-term deviations in the current premium index from the average premium index over the past hour on the funding rate. The outer clamp bounds the effect of long-term deviations in the average premium index on the funding rate. However, this outer bound is set sufficiently wide such that it is highly unlikely to be reached.

Thus, Synchronicity Exchange calculates the funding rate and funding payments to anchor perpetual future prices to their index prices.