Funding Rates

While margin trading unlocks the door to amplified gains, it also introduces another layer of complexity - funding requirements. Often overshadowed by margin requirements, understanding funding rates is crucial for responsible leveraged trading on Helix.

What are Funding Rates?

In traditional futures contracts, the price on the exchange converges with the spot price over time. In contrast, perpetual futures on Injective never expire, creating a potential disconnect between the contract price and the underlying asset’s spot price. To keep these prices in sync, a mechanism called funding payments kicks in.

Funding rates are essentially periodic fees exchanged between long and short positions. The direction of these payments depends on the prevailing market sentiment:

• Positive Funding Rates : If a significant majority of traders are long, long positions pay funding fees to short positions. This incentivises trading activity that could potentially bring the contract price down towards the spot price.
• Negative Funding Rates : Conversely, if most traders are short, long positions receive funding fees from short positions. This encourages trading activity that could potentially push the contract price up towards the spot price.

The specific calculation of funding rates is a formula that considers the difference between the contract price and the index price (a reference point representing the spot price), along with an interest rate component. While these rates may seem small at first glance, they can accumulate over time and significantly impact your trading experience.

For long position holders, positive funding rates represent an additional cost. You’ll be paying funding fees to short positions on each funding interval (e.g. at the top of the hour, each hour). Conversely, negative funding rates translate to receiving payments, essentially earning passive income on your open position.

For short position holders, the funding dynamic flips. Positive funding rates become a source of income, while negative funding rates translate to periodic payments you owe to long positions. Therefore, it’s crucial to factor potential funding costs into your margin calculations and risk management strategies.

How Funding is Calculated

Funding is calculated as:

$FundingRate = cap(TWAP + HourlyInterestRate,\ HourlyFundingRateCap)$

where

$TWAP = \frac{CumulativePrice}{(LastTimestamp + FundingInterval - NextFundingTimestamp) \times 24}$

The denominator represents the number of seconds between the start of the funding interval and the last trade, multiplied by 24 to normalize from a daily to hourly basis. If no trades occurred during the entire funding interval, the TWAP is zero and only the HourlyInterestRate contributes to the funding rate.

The system computes a Premium each block, representing how far the contract is trading from the mark price as a percentage:

$Premium = \frac{VWAP - MarkPrice}{MarkPrice}$

where VWAP is the volume-weighted average price of all trades executed in that block, across market buy executions, market sell executions, limit order matches, and atomic order executions.

Using this figure, a Cumulative Price is accumulated throughout the hour. At the end of each block where trades occur, the current Premium is multiplied by the time passed (in seconds) since the last update:

$CumulativePrice_{new} = CumulativePrice_{old} + Premium \times \Delta t$

Blocks with no trades do not update the cumulative price or the last timestamp. The premium is not carried forward - the TWAP denominator only counts time up to the last trade within the interval.

Example :

Let’s say you are long 10,000 USDT notional of INJ/USDT PERP (regardless of leverage), and the funding rate is +0.02%, at the top of the hour, you will make a funding payment of 2 USDT. Conversely, if you are short 10,000 notional of INJ/USDT PERP with the same funding rate, you will receive a funding payment of 2 USDT.

Let’s say you are short 20,000 USDT notional of BTC/USDT PERP, and the funding rate is -0.0035%. At the top of the hour, you make a funding payment of 0.7 USDT. Conversely, if you are long the same amount, you will receive a funding payment of 0.7 USDT.

Note, in some rare cases of extreme price volatility, there may be a small discrepancy between the estimated funding rate that you see on Helix, and the actual funding fee billed at the top of the hour.