> For the complete documentation index, see [llms.txt](https://docs.fluvion.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.fluvion.io/perpetual-futures-mechanics/funding-rate.md).

# Funding Rate Mechanism

Because perpetual contracts have no expiration date, a balancing mechanism is required to ensure that the perpetual market price stays tightly tethered to the underlying spot Index Price. This mechanism is the **Funding Rate**.

***

## How Funding Works

Funding payments are periodic cash flows exchanged **directly between Long and Short traders**.

> \[!NOTE] **Fluvion charges zero fee on funding payments.** 100% of the funding paid by one side is credited directly to the counterparty side.

```mermaid
flowchart TD
    A[Perp Price > Spot Index Price\n(Bullish Market Sentiment)] -->|Positive Funding Rate| B[Longs PAY Shorts]
    B --> C[Incentivizes Traders to Short / Sell Perps\nPushes Perp Price DOWN toward Spot]

    D[Perp Price < Spot Index Price\n(Bearish Market Sentiment)] -->|Negative Funding Rate| E[Shorts PAY Longs]
    E --> F[Incentivizes Traders to Long / Buy Perps\nPushes Perp Price UP toward Spot]
```

***

## Settlement Schedule

Funding settles automatically at regular recurring intervals:

* **Standard Frequency**: Every **8 hours** (at `00:00 UTC`, `08:00 UTC`, and `16:00 UTC`).
* **High-Volatility Markets**: In rapidly trending or newly listed markets, the funding interval may be adjusted to **4 hours** or **1 hour** to accelerate price convergence.

You will only pay or receive funding if you hold an open position at the exact moment the settlement timestamp strikes. If you close your position before the timestamp, you incur no funding obligation for that cycle.

***

## Funding Rate Calculation

The Funding Rate consists of two elements: the **Premium Index** and the **Interest Rate**.

```
Funding Rate = Clamp(Average Premium + Clamp(Interest Rate - Average Premium, Floor, Cap), -Max Funding, +Max Funding)
```

### 1. Premium Index & Impact Prices

To ensure the premium reflects genuine book depth rather than thin, manipulated top-of-book quotes, the system samples **Impact Bid** and **Impact Ask** prices every 15 seconds:

* **Impact Margin Notional**: The notional size tradeable with **1,000 USDC** at the market's maximum leverage (e.g. 100,000 USDC notional for a 100x market).
* **Impact Bid Price**: The average fill price of selling the Impact Margin Notional into the bids.
* **Impact Ask Price**: The average fill price of buying the Impact Margin Notional from the asks.

```
Premium = [max(0, Impact Bid - Index Price) - max(0, Index Price - Impact Ask)] / Index Price
```

### 2. Piecewise Linear Acceleration

During extreme market imbalances, a piecewise acceleration function is applied to the Average Premium (x) so that extreme price divergences correct faster:

| Deviation Region |       Condition      | Slope | Effect                      |
| ---------------- | :------------------: | :---: | --------------------------- |
| **Low**          |     abs(x) < 0.5%    |   1x  | Linear basis                |
| **Medium**       | 0.5% ≤ abs(x) < 1.5% |   2x  | Double rate acceleration    |
| **Large**        |     abs(x) ≥ 1.5%    |   4x  | Quadruple rate acceleration |

### 3. Interest Rate Component

The interest rate component accounts for the cost of borrowing between USDC and the underlying crypto asset, typically set to a baseline rate of **0.01% per 8-hour period**.

***

## Cash Flow Calculation for Traders

The funding payment applied to your account is calculated as:

```
Funding Fee = Position Notional × Funding Rate
Position Notional = Position Quantity × Mark Price
```

### Numerical Example:

* You hold a long position of **100 SOL** at a Mark Price of **150 USDC** (Notional = 15,000 USDC).
* The current 8-hour Funding Rate is **+0.02%** (+2 bps).
* Because the rate is positive and you are Long, you pay funding:
  * **Funding Paid**: `15,000 USDC × 0.0002` = **3.00 USDC**
* This **3.00 USDC** is automatically deducted from your account collateral and credited to Short position holders.


---

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