Funding payments are periodic transfers of value between traders who hold long and short positions in perpetual futures. Their purpose is to keep the perpetual contract’s price anchored near the underlying asset’s spot price, even though the contract has no expiry date.
How funding payments work in perpetual futures
Perpetual futures can trade above or below spot because of leverage, sentiment, and imbalances in demand for longs versus shorts. Exchanges address this by applying a funding mechanism at set intervals. If the perpetual price is above spot, funding is typically positive, meaning long traders pay short traders. This creates a cost for staying long and an incentive for traders to short, both of which can help pull the perpetual price back toward spot. If the perpetual price is below spot, funding is typically negative, meaning shorts pay longs, which can encourage long positioning and reduce downward divergence.
Unlike many exchange fees, funding payments generally move between traders, with the platform acting as the calculator and settlement layer. The exact formula varies by venue, but it commonly references a premium or discount versus an index price, plus an interest-like component.
Practical implications for traders
Funding payments affect the total cost or yield of holding leveraged positions. For example, a trader who stays long during extended bullish sentiment may repeatedly pay funding, which can erode returns even if price moves in their favor. Conversely, a trader can sometimes earn funding by taking the side that is being paid, though this still involves market risk if price moves against the position.
Funding payments matter because they help perpetual futures track spot markets, shape leverage-driven risk, and influence trading strategies across the crypto derivatives ecosystem.