# What Are Funding Rates? > How funding rates keep perpetual futures prices aligned with spot markets — what they are, how they work, and how traders can use them strategically. - Canonical: https://www.liquid.trade/learn/what-are-funding-rates - Published: 2026-03-23 - Category: Education - Tags: Guide, Perps, Beginner --- Funding is the periodic payment that keeps perpetual futures anchored to their reference markets. Sometimes you pay it. Sometimes you receive it. Either way, it directly affects PnL, liquidation risk, and the true cost of holding a perp position. **Funding is not a trading fee paid to the platform.** It is generally a peer-to-peer payment between traders on opposite sides of the market. ## Why Funding Exists Perpetual futures do not expire. That is what makes them useful — you can hold exposure without rolling a dated futures contract. But no expiry creates a problem. If there is no settlement date forcing the contract price and the reference price to converge, a perp could drift far away from the underlying market. **Funding is the incentive mechanism that pulls it back.** When a perp trades *above* its reference, funding usually turns **positive** — longs pay shorts. That makes long exposure more expensive and short exposure more attractive. When a perp trades *below* its reference, funding usually turns **negative** — shorts pay longs. ## Positive vs. Negative Funding The payment happens automatically at funding timestamps. If you hold a position at the timestamp, the payment is credited or debited according to your side, position size, and the funding rate for that interval. ## How Funding Is Calculated Exact formulas vary by venue, but most funding models have two broad components: - **Premium component** — measures whether the perp is trading above or below the oracle/reference price. - **Interest or adjustment component** — accounts for baseline carrying costs or clamps the final rate so short-lived dislocations do not produce unstable funding. Many venues calculate the premium using fair or impact prices rather than a single last trade. That helps avoid funding rates being distorted by one small print in a thin order book. ## When Does Funding Settle? Funding schedules vary by platform. Many perp venues quote funding on an 8-hour basis. Some settle every 8 hours. Others calculate the formula on an 8-hour convention but settle smaller proportional payments more frequently, such as hourly. The practical rule is simple: **know the funding schedule on the venue you are trading**. Open and close between funding timestamps and you may skip that payment. Hold through a timestamp and funding applies. ## Why Small Funding Rates Can Matter Funding looks tiny because it is quoted as a percentage of notional. But leveraged traders feel it through margin. A 0.03% rate on a $50,000 position is only $15. But if you posted $5,000 of margin, that's **0.3% of margin** for one interval. Three settlements a day, every day — and the holding cost compounds against any directional thesis. This bites hardest when you're on **high leverage**, holding **multiple days**, on the **crowded side**, with funding **elevated**, and a **narrow liquidation cushion**. ## Funding as a Sentiment Signal Funding can tell you where positioning is crowded. **Very high positive funding** often means longs are aggressively paying to stay in the trade. That can happen during strong uptrends, but it can also signal a crowded long setup vulnerable to a pullback. **Very negative funding** often means shorts are crowded. That can happen during downtrends, but it can also set up a [short squeeze](/learn/what-is-a-short-squeeze) if price reclaims key levels and shorts are forced to cover. Funding is not a standalone trading signal. It does not predict the future. It tells you the **cost of holding a side** and gives a read on market positioning. ## Funding Trades and Basis Risk Some traders try to collect funding while hedging price exposure — a cash-and-carry trade. Funding can flip. Basis can widen. Liquidation can hit the perp leg if margin is too thin. See margin mode and liquidation. } ]} /> Funding can flip from positive to negative. Perp and spot prices can diverge. Liquidation can happen on the perp leg. Execution costs can erase expected carry. Venue, oracle, and withdrawal risks all matter. The trade is **lower-directional-risk** than an outright position — it is not free money. ## How Funding Affects Stop Losses and Liquidation Funding payments change account equity. If you are paying funding, your margin cushion shrinks over time. That can bring your [liquidation](/learn/what-is-liquidation) price closer **even if the market price has not moved much**. For swing trades, your stop and take-profit plan should account for expected funding payments, current funding direction, whether funding is likely to remain stable, and how much funding affects margin at your chosen leverage. If a position only works when funding stays favourable, it is not just a directional trade — it is also a carry trade. ## Quick Reference - **Positive funding:** longs usually pay shorts. - **Negative funding:** shorts usually pay longs. - **Funding is not a platform fee:** it is generally exchanged between traders. - **Funding is based on notional:** not just posted margin. - **Frequency varies:** hourly and 8-hour models both exist. - **High funding is information:** it can reveal crowded positioning and carry cost. ## Further Reading - [Liquid docs: funding rates](https://docs.liquid.trade/trading/funding-rates) - [Liquid docs: fees](https://docs.liquid.trade/trading/fees) - [Liquid docs: liquidations](https://docs.liquid.trade/trading/liquidations) - [What Is Liquidation and How to Manage It](/learn/what-is-liquidation) ## Trade Perps on Liquid Liquid shows funding alongside position risk so you can understand the cost or credit of holding a trade. - **Create your account.** Sign up with email or connect a wallet. - **Fund your account.** Use supported funding methods or crypto deposits. - **Check funding before entry.** Know whether you are paying or receiving. - **Monitor over time.** Funding can change quickly when positioning becomes crowded.