What Is a Funding Rate? Definition & Example

A funding rate is a recurring payment exchanged directly between traders holding long and short positions in a perpetual futures market. It exists to solve a structural problem: a perpetual contract never expires, so there is no settlement date to force its price back in line with the underlying asset. Funding creates that pressure continuously instead.

The mechanism is simple. When the perpetual trades above spot price, the funding rate goes positive and longs pay shorts — making it expensive to stay long and attractive to be short, which pushes the perp price back down. When the perp trades below spot, the rate flips negative and shorts pay longs. The exchange takes no cut; the payment passes between traders.

Payment frequency varies by venue, and this matters enormously when comparing rates. Hyperliquid charges funding every hour. Binance, Bybit and OKX charge it every eight hours. A headline rate of 0.01% is therefore 87.6% annualised on Hyperliquid but only 10.95% on an 8-hour venue — the same number meaning something eight times different.

For traders, funding is both a cost and a signal. As a cost, it compounds: a $10,000 position held three days at 0.01% hourly pays $72, which is more than ten times the round-trip trading fee. As a signal, sustained extreme funding means positioning has become one-sided, everyone on the crowded side is paying to stay there, and the eventual unwind tends to be violent.

Traders who want the payment without the price risk run a carry trade: take the side that receives funding, then hedge the directional exposure with an offsetting spot position. The income is real but so are the risks — the rate can flip, two-leg execution costs money, and an under-margined perp leg can still be liquidated even when the combined book is flat.