A perpetual contract has no expiry to force its price back to the underlying, so it substitutes a periodic cash transfer between the long and short sides of the market. That transfer is the funding payment, and its size, direction and frequency are set mechanically by a formula each venue publishes, applied uniformly to every open position.
Without an expiry date, nothing structurally forces a perpetual's price to equal its index. Funding supplies the economic incentive instead: if the perpetual trades above index, longs pay shorts, which makes staying long more expensive and shorting more attractive, pulling price back down toward index. If the perpetual trades below index, the payment direction flips and pulls price back up. The payment itself does not directly move the price; it changes the economics of holding each side, which in turn is expected to draw arbitrage capital toward whichever side profits from closing the gap.
It is worth being precise about what funding is not: it is not a fee charged by the venue, and it is not created or destroyed in the process. It is a direct transfer between the two sides of the market, so on any given interval the total paid by longs equals the total received by shorts, or vice versa, before accounting for any separate trading fees the venue itself charges on top. The venue's role is limited to calculating the rate and moving the balances; it is not a counterparty to the payment the way it might be to a trading fee.
Funding is generally built from two pieces added together. The premium component measures the gap between the perpetual's own price and the index price over the funding window, and it is the piece that actually reacts to the venue's own supply and demand for longs versus shorts. The interest rate component reflects the cost-of-carry between the two currencies involved in the pair, which for a crypto-against-USD perpetual is typically small and often close to a fixed constant, since it is meant to capture a background financing cost. dYdX, for example, publishes its funding rate as the premium component divided by eight, plus the interest rate component, sampled continuously and averaged into an hourly settlement, a concrete illustration of how the two pieces combine in practice.
Eight hours was the interval set by the first major centralized perpetual venues and remains common across large centralized exchanges. Many newer venues, especially decentralized ones, settle hourly or continuously instead, which changes the size of each individual payment without changing the underlying economics: a shorter interval simply pays a smaller amount more often for the same rate over time, and a continuous model removes the fixed interval altogether in favor of accruing funding constantly against the position. A shorter interval also means the rate itself has more chances to reset in response to changing market conditions over a given day, so an hourly venue can, in principle, track a fast-changing imbalance between longs and shorts more closely than an eight-hour venue would.
dYdXThe sign convention is consistent across venues: a positive funding rate means longs pay shorts, and a negative rate means shorts pay longs. The payment is exchanged directly between position holders, credited or debited against each position's margin balance at every interval, whether or not the trader is actively watching the position. A trader who opens a position moments before a funding settlement still owes or receives that payment in full; there is no partial or prorated funding for a position held only briefly before the settlement moment. This all-or-nothing timing is precisely why some traders time entries and exits around funding settlement moments, opening a position just after a payment has been charged, though doing so consistently also means competing with other traders trying to do the same thing at the same moment.
Because the funding rate is applied to a position's full notional value, the cost or income from funding scales with leverage in the same way trading gains and losses do. A position opened with a small amount of margin at high leverage pays or receives the same dollar funding as an identical-notional position opened with far more margin at low leverage; the funding rate itself stays fixed regardless of leverage, while its size relative to the collateral actually at risk grows as leverage rises, which is worth remembering alongside the leverage mechanics covered in leverage ratios on perps .
A persistently positive funding rate, paid every interval, compounds into a real ongoing cost of holding a long position, separate from any price move in either direction. Because that cost accrues continuously in the background, it is worth checking alongside the position's own open interest, covered in open interest explained , and it is the same gap that basis traders try to capture directly, covered in basis trading on perps . The plain-language version of funding's role, without the formula detail, is at funding rate , and how that recurring payment fits alongside the position's overall structure is covered in perp position types .
The funding rate mechanism combines a premium component, measuring the gap between a perpetual's price and its index, with an interest rate component reflecting the cost-of-carry between the two currencies in the pair. The sum determines the rate; a positive rate means longs pay shorts, and a negative rate means shorts pay longs.
The funding interval is the fixed window at which a venue calculates and settles funding payments, commonly one hour, four hours, eight hours, or continuously depending on the venue. A shorter interval pays a smaller amount more often; a longer interval pays a larger amount less often, for the same underlying rate over time.
Funding works by charging or crediting each open position's margin balance at every funding interval, based on the sign and size of the calculated rate. The payment moves directly between the long and short sides of the market, and it applies regardless of whether the trader is actively monitoring the position at that moment.
Perpetual markets for stocks, gold, indices and pre-IPO names — settled on-chain, no wallet-to-exchange transfers.
