Perpetual contracts (“perps”) let you hold a leveraged long or short position with no expiry date. That convenience has a price that many traders only notice after a few weeks: the funding rate. On decentralized perpetual exchanges, funding is settled every hour, quietly adding to or subtracting from your margin. Understanding how it is calculated, and how quickly it compounds, is one of the most useful skills a perp trader can have.
Why perps need funding at all
A traditional futures contract converges to the spot price because it settles on a fixed date. A perpetual never settles, so something else has to pull its price back towards the underlying asset. That something is funding: a periodic payment between traders on opposite sides of the market. When the perp trades above the spot or oracle price, longs pay shorts. When it trades below, shorts pay longs. The payment makes the crowded side more expensive to hold and rewards traders who take the other side, which nudges the two prices back together.
Crucially, funding is peer-to-peer. On most venues the exchange itself does not keep it as a fee; it simply moves money from one group of traders to another.
How the rate is calculated on two major DEXs
The formulas differ in detail but share the same idea: measure the premium between the perp and the spot price, average it over time, and add a small interest component.
Hyperliquid. According to the Hyperliquid documentation, the premium is sampled every five seconds and averaged over the hour. The formula is expressed as an 8-hour rate, but one eighth of it is paid every hour. The interest component is fixed at 0.01% per 8 hours (0.00125% per hour), which the docs translate into roughly 11.6% a year paid by longs to shorts when the market is otherwise flat. Funding is capped at 4% per hour, a much looser cap than most centralized exchanges use, and the payment is calculated on position size multiplied by the oracle price rather than the mark price.
dYdX v4. The dYdX documentation describes a premium measured from “impact” bid and ask prices, meaning the average fill you would get trading a set notional size. Block proposers vote on the premium, the median vote becomes a one-minute sample, and the hourly rate is the average of the last 60 samples, divided by eight, plus an interest component. For cross-margined markets that interest component defaults to zero. The cap depends on the market’s margin tier: for a large-cap market such as BTC-USD the 8-hour rate is capped at 600% times the gap between initial and maintenance margin, which works out to 12%.
The maths that catches people out
Funding rates look tiny because they are quoted per hour. Annualising them is sobering. Take a $50,000 long position and a funding rate of 0.01% per hour:
- Per hour: $50,000 × 0.0001 = $5
- Per day: $5 × 24 = $120
- Per year: $120 × 365 = $43,800, or about 87.6% of the position’s notional value
Now remember that the position is leveraged. If you posted $10,000 of margin to open that $50,000 position (5x), a single month at that rate costs about $3,600, more than a third of your collateral, before the price has moved at all. In euphoric markets, when everyone wants to be long, hourly rates several times higher than this example are not unusual on smaller tokens.
Reading funding as a market signal
Because funding reflects which side is more crowded, it doubles as a sentiment gauge:
- Persistently high positive funding means longs are paying heavily to stay in. The trade is crowded, and crowded trades are vulnerable to sharp liquidation cascades if the price dips.
- Negative funding means shorts are paying. This often appears after sell-offs and can precede short squeezes.
- Funding near the baseline suggests a balanced market where carrying a position is cheap.
Funding is a lagging, averaged number, so treat it as context, not as a trading signal on its own.
Practical habits for perp traders
- Check the predicted rate before you open. Most DEX interfaces show the current and next estimated rate. Multiply it out over your expected holding period.
- Budget funding into your target. A swing trade you plan to hold for two weeks needs to beat two weeks of funding, not just the trading fees.
- Watch the hourly rhythm. Unlike venues that settle every eight hours, hourly funding means there is no “safe” moment to dodge a payment by closing just before settlement.
- Know the cap. A 4% hourly cap means that in extreme conditions funding can drain margin very quickly. Keep a buffer above your liquidation price that accounts for it.
- Remember the oracle. Funding on these venues is tied to oracle prices built from external markets. If you trade thinly traded assets, oracle quality matters as much as the formula.
The cash-and-carry idea, and its limits
When funding is strongly positive, some traders buy the asset on spot and short the same amount on a perp, collecting funding while their price exposure roughly cancels out. This “basis” or “cash-and-carry” trade is popular, but it is not risk-free: funding can flip negative, the short leg can be liquidated in a sharp rally if it is under-margined, and smart contract or exchange risk applies to both legs. It works best for traders who monitor positions closely and size conservatively.
Bottom line
Funding is the rent you pay, or receive, for holding a perpetual position. On decentralized exchanges it is calculated transparently and settled every hour, which is fair but relentless. Before your next leveraged trade, convert the quoted rate into a daily and monthly figure and compare it with your margin. That one habit prevents a surprising number of slow, avoidable losses.
Disclaimer: This article is for general information only and is not financial advice. Leveraged derivatives trading is high risk and can result in the loss of your entire margin. Funding formulas and parameters change through governance and protocol updates, so always check the current documentation of the venue you use.