#MyFirstFeedPost
Hello everyone, I am NAT, from Degen Dog, and currently working as an intern at Blave. In my first article, let’s talk about “Derivatives Data”!
1. Funding Rate/funding rate
Perpetual contract, perpetual = a futures contract with no expiration date!
If there is no expiration date, how can the contract stay consistent with the underlying price?
Answer: funding rate!
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The function of the funding rate is to ensure that "the price is as close as possible to the spot price!"
When the funding rate is positive, longs pay interest to shorts~
When the funding rate is negative, shorts pay interest to longs~
Payment is generally made every eight hours!
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Funding is positive = futures price is higher than spot = longs pay the rate!
Negative funding = futures price is lower than spot = short sellers pay rates!
The greater the difference between the futures price and the mark price, the higher/lower the funding rate~
This mechanism ensures that futures prices are as close as possible to spot prices!
When the price deviates from the spot price, the funding rate will increase, higher fees will be paid, and the cost of holding a position will be higher~
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Example:
If the bulls are very aggressive and push the perpetual contract price well above the spot price
High funding rate = going long requires high holding costs
You can also take advantage of high fees for reverse short arbitrage = buy spot and sell futures
Large amounts of spot buying can also close the rate gap, but this is less common when most of the price increases are driven by futures! Vice versa~
Welcome to follow on Twitter: @NAT_BLAVE
(If you want to join Degen Dog, you can also send me a private message ✅
