USDT Contract Funding Fee

1. Funding Rate

The price of traditional futures contracts may deviate from the spot price, and this deviation is known as the basis. As the futures contract approaches its expiration date, this basis tends to approach zero. Since perpetual contracts do not expire, the funding fee mechanism ensures that the perpetual contract market price aligned with the spot price. When the funding rate is positive, longs pay shorts. When the funding rate is negative, shorts pay longs.

2. Funding Fee

Timing of Funding Fee Collection

The funding fee is collected every 8 hours, specifically at 08:00, 16:00, and 24:00 (GMT+8). Users need to pay or receive the funding fee only if they hold positions at these specific times. If a position is closed before the fee collection time, no need funding fee is required.

The funding fee you pay or receive is calculated as follows:

Funding Fee = Position Value * Funding Rate

Position Value = Contract Quantity * Contract Value * Latest Mark Price

Your position value is independent of leverage ratio. When the funding rate is positive, longs pay shorts. When the funding rate is negative, shorts pay longs.

For example, if Xiao Ming holds 100 long contracts with a contract value of 0.001 and the current mark price for BTC perpetual contracts is 8,000 USDT, with a funding rate of 0.01%, Xiao Ming needs to pay a funding fee of 0.001 * 100 * 8,000 * 0.01% = 0.08 USDT.

3. Principle of Funding Rate

The funding rate consists of two parts: the interest rate and the premium/discount. This rate is designated to ensures that the perpetual swap contract's trading price closely follows the underlying reference price. Through this mechanism, the swap contract resembles a margin trading spot market where buyers and sellers regularly exchange funding rates.

Interest Rate Component

The interest rate depends on the borrowing rates of the base and quote currencies.

Interest Rate (I) = (Quote Interest Rate Index - Base Interest Rate Index) / Funding Rate Interval

USDT contracts use a fixed rate in the funding rate calculation. The default rate is set at 0.00% per day and may be adjusted based on market factors such as the federal funds rate.

Premium/Discount Component

Sometimes, the price of the perpetual swap contract may have a significant premium or discount compared to the mark price. In this case, the premium index will be used to increase or decrease the next funding rate to align with the current swap contract trading level.The calculation is as follows:

Premium Index (P) = (Max (0, Depth Weighted Bid Price - Mark Price) - Max (0, Mark Price - Depth Weighted Ask Price)) / Spot Price + Mark Price Reasonable Basis

Depth Weighted Bid/Ask Price

 Depth weighted bid price refers to the average bid order price, starting from the first bid on the order book and accumulating the order quantity until it reaches N contracts.

The value of N is 80 contracts for BTC perpetual contracts and 800 contracts for other cryptocurrency contracts.

Final Funding Rate Calculation

ALL IN calculates the premium index every minute and then computes its minute-time weighted average every 8 hours. The funding rate is calculated based on the 8-hour interest rate and premium/discount components, with an added +/- 0.05% buffer.

Funding Rate (F) = Premium Index (P) + clamp (Interest Rate (I) - Premium Index (P), 0.05%, -0.05%)

Thus, if (I - P) is within +/-0.05%, then F = P + (I - P) = I. In other words, as long as the premium index is between -0.04% and 0.06%, the funding rate will be equal to 0.01% (the interest rate).

Funding Rate Caps

ALL IN caps the funding rate to ensure the highest leverage can be used. To achieve this, two limits are imposed:

1. The absolute cap on the funding rate is (Initial Margin Rate - Maintenance Margin Rate) * 75%. If the initial margin is 1% and the maintenance margin is 0.5%, the maximum funding rate will be 75% * (1% - 0.5%) = 0.375%.

2. The funding rate must not vary by more than 75% of the maintenance margin within the funding interval.