How is the funding rate calculated?

First, the simplest conclusion:
Funding rate = Interest rate + Premium index (the contract's premium relative to spot), settled every 8 hours, determining who pays whom.

Next, divided into three parts: formula, how to calculate, and how it affects you.


1. Funding Rate (Funding Rate) formula (used by mainstream exchanges)

1. Composition: two parts

- Interest rate I: fixed, representing the cost difference of borrowing
Common: daily interest rate 0.03% → 0.01% every 8 hours
- Premium index P: deviation of contract price vs. spot price
P ≈ (contract price − spot index price) / spot index price

2. Final rate formula (simplified version)


F = P + \text{clamp}(I-P,\ -0.05\%,\ +0.05\%)


- clamp(a, min, max): limits a within [min, max]
- Meaning: the rate mainly depends on the premium P, with interest rate making only slight adjustments, and each time up to ±0.05%

3. Settlement cycle

- Most: settled every 8 hours (0:00, 8:00, 16:00 UTC)
- Three times a day, daily rate ≈ single settlement rate × 3

 

2. How to calculate funding costs (how much you actually pay)


\text{Funding Cost} = \text{Position Nominal Value} \times \text{Funding Rate}


Example (LINK/USDT, USDT-margined)

- Position: Long 10,000 USDT
- Funding rate: +0.02% (positive)
- Cost this time:
10,000 × 0.02% = 2 USDT
- Direction: positive rate → longs pay shorts

Another example: rate −0.01% (negative)

- Cost: 10,000 × (−0.01%) = −1 USDT
- Direction: shorts pay longs

 

3. Details of interest rate I and premium index P (quick understanding)

1. Interest rate I (very fixed)

- Mainstream: I = 0.01% / 8 hours (daily 0.03%)
- USDT-margined contracts are basically constant, can be viewed as fixed

2. Premium index P (most critical, volatile)

- Contract > spot → P > 0 → rate tends to be positive → longs pay
- Contract < spot → P < 0 → rate tends to be negative → shorts pay
- Exchanges use depth-weighted bid/ask prices to prevent manipulation

 

4. The role of clamp (to prevent explosive rates)

- Inside the parentheses: I−P is limited to ±0.05%
- So, a single funding rate won't be extreme, commonly in the range of −0.05% to +0.075% (may vary slightly across exchanges)

 

5. What it means for your trading (especially important for coins like LINK)

- Long-term positive rates: market is bullish, contract premium is high
→ Long positions keep paying, long-term cost is high
- Long-term negative rates: market is bearish, contract is discounted
→ Long positions can earn funding fees, suitable for “funding fee arbitrage long positions”
- LINK features: moderate volatility, lots of institutional funds, rates often between −0.01% and +0.03%
→ When trading swings, include funding costs in your calculations