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Perpetual Funding

Funding is the mechanism that keeps perpetual contract prices anchored to the underlying spot price. It is a periodic payment between longs and shorts, entirely peer-to-peer. The exchange takes no cut.

If you have traded perps, you have paid or received funding. If you have traded options, funding is the closest analogy to theta decay.

How Funding Works​

A perpetual contract has no expiry, so there is no natural convergence to spot. Funding replaces that convergence with a financial incentive:

  • When the perp trades above spot, longs pay shorts (positive funding)
  • When the perp trades below spot, shorts pay longs (negative funding)

This creates a cost for the side pushing the price away from spot, and a reward for the side pulling it back.

Funding state:
LONGSPayingSHORTSReceiving+0.01% / hrMarket conditionPerp > Spot (premium)Funding is peer-to-peer. The exchange takes no cut.
Positive Funding: Perp trades above spot. Longs pay shorts. This mechanism pushes the perp price back toward spot, because the side that's "winning" the divergence has to keep paying for it.

Why it works​

If you are long a perp trading at a premium to spot, you are paying funding to shorts. An arbitrageur can short the perp and buy spot, collecting the funding as risk-free yield. This selling pressure pushes the perp price back toward spot. The mechanism is self-correcting.

Hyperliquid's Funding Formula​

On Hyperliquid, funding is calculated and paid every hour. The rate is computed from two components: a base interest rate and a premium index.

F=P+clamp(r−P,−0.0005,0.0005)F = P + \text{clamp}(r - P, -0.0005, 0.0005)

Where:

  • FF = funding rate (per hour)
  • PP = premium index (average over the hour)
  • rr = base interest rate (0.01% per 8 hours = 0.00125% per hour)

Premium Index​

The premium index measures how far the perp price deviates from the oracle (spot) price:

premium=impact_bid−impact_ask_offsetoracle_price\text{premium} = \frac{\text{impact\_bid} - \text{impact\_ask\_offset}}{\text{oracle\_price}}

More precisely:

impact_diff=max⁡(bid−oracle,0)−max⁡(oracle−ask,0)\text{impact\_diff} = \max(\text{bid} - \text{oracle}, 0) - \max(\text{oracle} - \text{ask}, 0)

Where "bid" and "ask" are the impact bid and impact ask prices.

The impact bid and ask are the volume-weighted prices to fill a certain notional size on each side of the book. This makes the premium resistant to manipulation by thin orders far from the market.

Try it: Premium index calculator​

Adjust the oracle price and order book impact prices to see how the premium index and resulting funding rate change in real time.

Adjust the order book impact prices to see how the premium index and funding rate change.
Oracle Price (Spot)$100,000
$90,000$110,000
Impact Bid (Buy Side)$100,200
$99,000$101,000
Impact Ask (Sell Side)$99,900
$99,000$101,000
max(impact_bid - oracle, 0) = max(100,200 - 100,000, 0) = 200
max(oracle - impact_ask, 0) = max(100,000 - 99,900, 0) = 100
impact_diff = 200 - 100 = +100
premium = +100 / 100,000 = +0.1000%
Shorts pay longs0Longs pay shorts
Premium Index
+0.1000%
Funding Rate (hourly)
+0.05000%
Direction
Longs pay shorts

Base Interest Rate​

The base rate is a fixed 0.01% per 8 hours (approximately 11% APR), representing the cost of carry for holding a synthetic long position. This is the "interest" component, analogous to the borrowing cost in traditional futures.

In the funding formula, the clamp function limits how much the interest rate component can deviate from the premium. This ensures that when the premium is large, it dominates the funding rate.

Payment Calculation​

Each hour, every open position pays or receives:

funding_payment=position_size×oracle_price×F\text{funding\_payment} = \text{position\_size} \times \text{oracle\_price} \times F

The oracle price (not the mark price) is used to convert position size to notional value.

ℹ️
Oracle prices

Hyperliquid oracle prices are computed by each validator as the weighted median of centralized exchange spot prices, weighted by liquidity. This makes them resistant to manipulation on any single venue.

Rate Caps​

Funding on Hyperliquid is capped at 4% per hour. This prevents extreme funding in volatile markets from becoming larger than the position itself.

Funding as a Cost of Carry​

For most market conditions, funding is positive: longs pay shorts. This makes intuitive sense. A long perp is synthetic spot exposure with leverage. You are effectively borrowing capital to hold the position, and funding is the interest on that loan.

Positive Funding (Typical)

Longs pay shorts

  • Perp trades at a premium to spot
  • More demand for long exposure than short
  • Long holders pay an ongoing cost
  • Analogous to paying interest on a margin loan
  • Creates a headwind for long-and-hold strategies
If you are long a perp in positive funding, you are bleeding capital every hour.

Negative Funding (Less Common)

Shorts pay longs

  • Perp trades at a discount to spot
  • More demand for short exposure than long
  • Short holders pay an ongoing cost
  • Often occurs during sharp sell-offs or panic
  • Can flip quickly as sentiment changes
Negative funding means you get paid to be long. This rarely lasts.

Annualized cost​

A funding rate of 0.01% per hour compounds to roughly 88% APR if sustained. Even seemingly small rates add up:

Hourly RateDaily CostMonthly CostAnnualized
0.005%0.12%3.6%~44%
0.01%0.24%7.2%~88%
0.02%0.48%14.4%~176%
0.05%1.2%36%~440%
⚠️
Funding is not free

A common mistake: holding a leveraged long perp during a bull market and ignoring funding. If funding averages 0.01%/hr over a month, you pay ~7.2% of your notional in funding alone. That is a significant drag on returns.

Funding vs Theta​

If you have read Options vs Perpetuals, you know that funding and theta serve similar roles: both are the ongoing cost of holding a directional position.

Perp FundingOption Theta
What it costsVariable rate, changes hourlyDeterministic, accelerates near expiry
Who paysLongs or shorts, depending on marketAlways the option holder (buyer)
PredictabilityUnpredictable, depends on market demandKnown in advance from Black-Scholes
What you get for itLinear exposure (no convexity)Convex exposure (gamma)
Can it flip?Yes, negative funding pays youNo, theta always decays

The critical difference: theta buys you gamma (convexity). Funding buys you a straight line. You pay a similar ongoing cost, but you get very different things in return.

Funding is sometimes cheaper than theta for equivalent exposure. This happens when:

  1. Funding is negative: You get paid to hold. Theta is always a cost.
  2. Funding is very low: In calm markets, funding can be near zero. Theta still decays.
  3. Short holding period: For a 1-hour scalp, funding is negligible. An option would lose meaningful theta overnight.

The tradeoff: you give up convexity (gamma) and take on path dependence (liquidation risk). Whether that is worth it depends on your time horizon and conviction in the path.

Funding Strategies​

Cash and Carry (Basis Trade)​

The most classic funding strategy: go long spot, short perp. You collect positive funding as yield while being market-neutral.

  • How it works: Buy 1 BTC spot, short 1 BTC perp. Net delta is zero. Collect funding every hour.
  • Risks: Funding can turn negative. Basis can compress. Execution risk on the two legs. And critically: ADL risk. Your profitable short perp sits near the top of the ADL queue.
  • Typical yield: Varies wildly. Can be 10-50%+ APR in bull markets, near zero or negative in bear markets.

Protocols like Ethena (ENA/USDe) run this strategy at scale, backing their stablecoin with delta-neutral spot + short perp positions. At their size, ADL risk is existential, which is why Ethena has negotiated special ADL exemptions with exchanges like Binance. Regular basis traders do not have this protection.

Funding Rate Arbitrage​

When funding diverges between venues (e.g., Hyperliquid vs a CEX), traders can short on the high-funding venue and long on the low-funding venue, pocketing the difference.

Monitoring Funding as a Signal​

Extreme funding rates are informative:

SignalInterpretation
Sustained high positive fundingMarket is overleveraged long. Vulnerable to a squeeze.
Spike in negative fundingPanic selling. Often near local bottoms.
Funding flipping from positive to negativeSentiment shift. Longs are unwinding.

Hyperliquid-Specific Details​

  • Frequency: Hourly (not 8-hour like some venues)
  • Base rate: 0.01% per 8 hours (0.00125% per hour, ~11% APR)
  • Cap: 4% per hour
  • Oracle: Weighted median of CEX spot prices, computed by validators
  • Settlement: Uses oracle price for notional calculation, not mark price
  • Peer-to-peer: The exchange does not collect funding. Every dollar paid by one side is received by the other.

HIP-3 Builder-Deployed Perps and Funding​

HIP-3 allows builders to deploy their own perpetual markets on Hyperliquid. These markets use the same funding formula as validator-operated markets, but with one important difference: the oracle price is set by the deployer.

Since the premium index is calculated relative to the oracle price, the deployer's oracle choice directly affects funding dynamics:

  • If the deployer's oracle diverges from the true market price, funding rates will reflect that divergence
  • Builders are responsible for oracle accuracy. Validators can slash builders for irregular oracle inputs
  • Markets currently use isolated margin only (cross margin support is planned)
ℹ️
Same formula, different oracle

HIP-3 markets do not have custom funding rate formulas. The funding mechanism is identical to native Hyperliquid perps. The difference is who provides the oracle price. Custom fee structures and funding configurability are planned for a future upgrade.

See Also​