💸Understanding Funding Rates

Introduction

Funding rates are crucial components in the trading of perpetual contracts on IntentX. These are periodic payments exchanged between traders and solvers who hold positions in perpetual contracts. The funding rate mechanism ensures that the price of the perpetual contract remains close to the underlying asset's spot price.

How Funding Rates Work

• Positive and Negative Rates: Funding rates can be either positive or negative, fluctuating based on the price difference between the perpetual contract and the spot price of the underlying asset.

  • A positive funding rate occurs when the perpetual contract price is higher than the spot price, resulting in traders with long positions paying solvers holding corresponding short positions. This payment discourages traders from opening/holding long positions when the perp price is significantly higher than the spot price, as it becomes costly to maintain these positions.

  • Conversely, a negative funding rate arises when the perpetual contract price is lower than the spot price, leading to solvers with short positions compensating traders with corresponding long positions. This mechanism discourages maintaining short positions when the perp price is significantly lower than the spot price, as it becomes expensive to hold short positions.

• Price Alignment: This funding rate mechanism ensures that the perpetual contract price aligns closely with the spot price of the underlying asset, maintaining market stability and fairness.

Key Features of Funding Rates on IntentX

• Solvers-Driven Pricing: IntentX's pricing data is primarily influenced by the rates set by Solvers, ensuring accurate and reliable information for calculating funding rates. While Solvers often engage with CEXs, they are not limited to these platforms and can also interact with DEXs or other markets, offering a broader and more flexible pricing foundation.

• Solver Interaction: Funding rates are determined through interactions between traders and solvers, ensuring that the rates are competitive and market-driven.

Note: Currently the solver will not charge or credit funding fees if the amount to do so is lower than the blockchain gas cost. This is because every funding rate update requires an on-chain interaction with the trade position.

Importance for Traders

Understanding funding rates is vital for traders on IntentX as these rates influence the cost of maintaining open positions in the market. Traders should consider the funding rates when planning their trading strategies, as these rates can impact the profitability of trades over time.

Conclusion

Funding rates play a pivotal role in the trading of perpetual contracts on IntentX. With a mechanism that ensures price alignment with the underlying asset and provides a fair trading environment, funding rates are integral to the profitable and strategic trading of perpetual contracts on the platform.